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|Title: ||Combining Quote-Driven and Order-Driven Trading Systems in
Next-Generation Stock Markets: An Experimental Investigation|
|Authors: ||Schwartz, Robert A.|
Weber, Bruce W.
|Issue Date: ||Jul-1996 |
|Publisher: ||Stern School of Business, New York University|
|Series/Report no.: ||IS-96-13|
|Abstract: ||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.|
|Appears in Collections:||IOMS: Information Systems Working Papers|
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