TRANSPARENCY AND BYPASS IN ELECTRONIC FINANCIAL MARKETS

Electronic markets use information technology to disseminate information on prices, quantities, and buyer and supplier identities. In spite of the recognized benefits of electronic markets, increased visibility and transparency may introduce imperfections, and create profitable opportunities to bypass markets that generates the information. In the U.S. securities markets, dissemination of market data has equipped several firms to develop competing, off-exchange trading mechanisms that rely on market price data, but whose transactions bypass the established market. Concern is rising that the growing volume of trading occurring away from the main market may reduce liquidity, and increase transactions costs. A simulation model of securities trading in a continuous auction market (similar to the market structure of the New York Stock Exchange) is used to examine the market quality effects of increasing levels of trading activity through an off-exchange dealer. Market characteristics, such as transactions costs, are measured as off-exchange trading increases from zero percent to 20 percent of the total trading volume. The results indicate that competition from an alternative trading venue reduces some trading costs borne by investors. Contrary to regulatory goals, however, off-market trading expands the role of profit-seeking dealers, and lowers the probability that some investors' orders will execute.Information Systems Working Papers Serie

Advancing Physician Performance Measurement: Using Administrative Data to Assess Physician Quality and Efficiency

Summarizes national initiatives to advance the practice of standardized measurement and outlines goals for developing a method for tracking efficiency and quality that will reward physicians and enable patients to make informed healthcare choices

DEMAND FOR OFF-EXCHANGE TRADING SYSTEMS: TRADING PREFERENCES OF INVESTORS ON THE LONDON STOCK EXCHANGE

The London Stock Exchange (LSE) faces rising pressure in its efforts to maintain its position as a favored market of institutional fund managers and professional investors. Customers are satisfied with the current state of the LSE market, but member firms are pricing institutional brokerage and market making services below economic cost. The LSE's position will be significantly damaged when the effective subsidy ends, and commissions and dealing spreads reflect the costs incurred by members firms. Competition in the supply of trading services has increased, and a range of alternative, off-exchange trading systems could draw order flow away from the Exchange market. These trading mechanisms provide order matching, crossing of basket and portfolio trades, and reduce investors' commissions and trading spread costs. Fund managers in the U.S. are using the systems more actively, and the result has been an erosion of the position of the New York Stock Exchange. The LSE's customers are also using an expanding range of portfolio management techniques, many of which require low-cost trading, and do not demand immediate order execution, as traditionally provided by London's market makers. The Exchange needs to respond to the changes in fund managers' demand for trading services, and to the growing competition in the supply of off-exchange trading services. Enhancements to the existing LSE market structure are the best response to these threats.Information Systems Working Papers Serie