Portfolio Preference Elicitation in Institutional Crossing Markets

TL;DR

This paper models portfolio preference elicitation in institutional crossing markets, proposing a hybrid query approach that significantly improves welfare recovery over traditional methods, with insights into package representations.

Contribution

It introduces a hybrid demand and value query framework for portfolio crossing, demonstrating its effectiveness through market-calibrated experiments and analyzing package representation choices.

Findings

Hybrid query procedure recovers up to 95% welfare with expanded communication.

Demand-only and value-only methods recover about 50% welfare under limited queries.

Security-level packages are efficient when securities disclosure is inexpensive; baskets are better when pretrade message costs are high.

Abstract

Institutional crossing platforms face a hidden-information problem: investors value trades as portfolios, but liquidity discovery is typically organized around individual securities. We model portfolio crossing as limited-communication preference elicitation over signed portfolio trades. The platform first uses price-directed demand queries to search the portfolio space and then verifies selected packages through value queries; an incumbent verification query records the demand-discovered allocation before further exploration. Final allocations are chosen from elicited reports, so the learning model guides queries but does not determine welfare. The analysis shows why search and verification are complementary. Demand queries locate high-value regions of a nonseparable portfolio space, but they provide only conservative welfare evidence unless selected packages are verified. Value queries provide exact welfare comparisons, but they are ineffective when applied to poorly targeted packages. Market-calibrated experiments using equity panels from the United States, Korea, Japan, and Germany show that demand-only and value-only designs recover only about half of full-information welfare under a limited query budget, whereas the hybrid procedure recovers 88\% and approaches 95\% as communication expands. We then compare exact security-level packages with factor-completed basket packages within the same allocation rule. Security-level packages are the unadjusted-efficiency mode when exact-securities disclosure is inexpensive. Factor-completed baskets become preferable when pretrade message informativeness is costly. The results characterize portfolio crossing as a selective verification problem and identify disclosure-sensitive package representation as a core design choice for hidden liquidity platforms.