4,022 research outputs found
The quality of price formation at market openings and closings: evidence from the Nasdaq stock market
Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It is optimal for the CCP to face default losses to achieve the efficient level of trade. To cover these losses, the CCP optimally uses margin calls, and, as the default problem becomes more severe, also requires default funds and then imposes position limits
Combining Quote-Driven and Order-Driven Trading Systems in Next-Generation Stock Markets: An Experimental Investigation
We use computer-based simulations of a stock market as a background environment
for experimental tests of the integration of an order-driven trading system
into a dealer/quote-driven market. Experimental subjects traded using a traditional
dealer quote screen (such as Nasdaq in the U.S. or the London Stock
Exchange's SEAQ), to which was added a public limit order facility. Data
captured on subjects' trading decisions under different market structures revealed
that: (1) When available, the limit order facility was used by the subjects,
attracting some orders that would have otherwise gone to dealers, and reducing
investor trading costs. (2) The relative use of market orders and limit orders was
related to the bid-ask spread; wider spreads (higher cost of immediate trading) led
subjects to enter fewer market orders. (3) Limit order use was reduced when the
dealers were provided with an "informational advantage. " (4) While the introduction
of a limit order facility did not have a substantial effect on dealer profit
margins, dealers' activities as a percentage of total market volume declined.
Overall, we find the simulation environment is a workable device for analyzing
the effect of market design changes on trader behavior and market quality. It can
provide solid guidance on market structure issues, such as how best to incorporate
a limit order facility in a competing dealer market.Information Systems Working Papers Serie
- ā¦