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http://hdl.handle.net/2451/26264
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| Title: | Equilibrium Fee Schedules in a Monopolist Call Market |
| Authors: | Economides, Nicholas
Heisler, Jeff |
| Issue Date: | Aug-1994 |
| Series/Report no.: | EC-94-15 |
| Abstract: | Liquidity plays a crucial role in financial exchange markets. Markets
typically create liquidity through spatial consolidation with
specialist/market makers matching orders arriving at different times.
However, continuous trading systems have an inherent weakness in the
potential for insufficient liquidity. This risk was highlighted during
the 1987 market crash. Subsequent proposals suggested time consolidation
in the form of call markets integrated into the continuous trading
environment. This paper explores the optimal fee schedule for a
monopolist call market auctioneer competing with a continuous auction
market. Liquidity is an externality in that traders are not fully
compensated for the liquidity they bring to the market. Thus, in the
absence of differential transaction costs, traders have an incentive to
delay order entry resulting in significant uncertainty in the number of
traders participating at the call. A well-designed call market mechanism
has to mitigate this uncertainty. The trading mechanism examined
utilizes two elements: commitments to trade and discounts in fees for
early commitment; thus, optimal transaction fees are time-dependent.
Traders who commit early are rewarded for the enhanced liquidity that
their commitment provides to the market. As participants commit earlier
they pay strictly lower fees and are strictly better off by
participating in the call market rather than in the continuous market. A
comparison to the social welfare maximizing fee schedule shows that the
monopolist does not internalize the externality completely, with the
social welfare maximizing schedule offering lower fees to all traders. |
| URI: | http://hdl.handle.net/2451/26264 |
| Appears in Collections: | Economics Working Papers
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