Workup

In pure limit-order markets, the use of large orders is discouraged by potential front-runners. This problem can be mitigated by using expandable orders or iceberg orders, or by splitting a large order into smaller ones. An expandable order gives a trader an option to sequentially expand the size of his trade while holding the price fixed. An iceberg order enables a trader to commit to a maximal trade size at some price, without fully revealing that size to other traders. This paper provides a theoretical model of expandable orders and the accompanying quantity negotiation, called (also by practitioners) the “workup”. The workup is ubiquitous in the U.S. and Canadian bond markets and in over-the-counter markets. The model suggests that even when iceberg orders are available, traders will still use the workup if splitting an order is prohibitively costly, front-running is a threat, and the exchange lacks trust.