Principal Trading Arrangements: When Are Common Contracts Optimal?

Markus Baldauf, Christoph Frei, Joshua Mollner

Research output: Contribution to journalArticlepeer-review


Many financial arrangements reference market prices that are yet to be realized at the time of contracting and consequently susceptible to manipulation. Two of the most common such arrangements are as follows: (i) guaranteed volume-weighted average price (VWAP) contracts, which reference the VWAP prevailing over an execution window, and (ii) market-on-close contracts, which reference the price prevailing at the window’s end. To study such situations, we introduce a stylized model of financial contracting between a client, who wishes to trade a large position, and the client’s dealer. We provide conditions under which guaranteed VWAP contracts are optimal in this principal-agent problem. In contrast, market-on-close contracts generally cannot be optimal. These results explain the use of guaranteed VWAP contracts in practice, question the use of market-on-close contracts, and suggest considerations for the design of financial benchmarks.

Original languageEnglish (US)
Pages (from-to)3112-3128
Number of pages17
JournalManagement Science
Issue number4
StatePublished - Apr 2022


  • benchmark manipulation
  • dealer-client agency conflict
  • front-running
  • principal trading
  • volume-weighted average price (VWAP)

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


Dive into the research topics of 'Principal Trading Arrangements: When Are Common Contracts Optimal?'. Together they form a unique fingerprint.

Cite this