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on Market Microstructure |
| By: | Jeremy Large (All Souls College, University of Oxford) |
| Abstract: | Using a stochastic sequential game in ergodic equilibrium, this paper models limit order book trading dynamics. It deduces investor surplus and some agents' strategies from depth's stationarity, while bypassing altogether agents' intricate forecasting problems. Market inefficiency adjusts to induce equal supply and demand for liquidity over time. Consequently, at a given bid-ask spread surplus per investor is invariant to faster, more regular or more sophisticated trading, or modified queuing rules: apparent improvements are offset as inefficiency adjusts back to market-clearing levels. Moreover, investor surplus decreases with the spread. In the model, price discreteness fixes the spread at the tick size. Narrowing the tick is beneficial, but may be resisted by sell-side traders. |
| Keywords: | stochastic sequential game, ergodic equilibrium, market microstructure, limit order book, market depths, bid-ask spread |
| JEL: | C73 G14 G24 |
| Date: | 2006–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0608&r=mst |
| By: | Marco LiCalzi; Paolo Pellizzari (Department of Applied Mathematics, University of Venice) |
| Abstract: | This paper studies the performance of four market protocols with egard to allocative efficiency and other performance criteria such as volume or volatility. We examine batch auctions, continuous double auctions, specialist dealerships, and a hybrid of these last two. All protocols are practically implementable because the messages that traders need to use are simple. We test the protocols by running (computerized) experiments in an environment that controls for tradersÕ behavior and rules out any informational effect. We find that all protocols generically converge to the efficient allocation in finite time. An extended comparison over other performance criteria produces no clear winner, but the presence of a specialist is associated with the best all-round performance. |
| Keywords: | market microstructure, allocative efficiency, comparison of market institutions, performance criteria. |
| JEL: | G19 D61 D44 C63 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:136&r=mst |