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The Handbook of Market Design$
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Nir Vulkan, Alvin E. Roth, and Zvika Neeman

Print publication date: 2013

Print ISBN-13: 9780199570515

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199570515.001.0001

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Three Case Studies of Competing Designs in Financial Markets

Three Case Studies of Competing Designs in Financial Markets

Chapter:
(p.629) Chapter 25 Three Case Studies of Competing Designs in Financial Markets
Source:
The Handbook of Market Design
Author(s):

Nir Vulkan

Zvika Neeman

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199570515.003.0026

In recent years most financial exchanges introduced parallel trading mechanisms: Block or over the counter trading which is largely bilateral; and limit order books where at any given point in time the price is the same for all traders and is determined by supply and demand. This chapter presents three case studies which look at detailed data from various financial exchanges and tries to relate that to the various theoretical explanations that has been proposed to explain traders' short and long term choice of which mechanism to use. In particular we look for long term trend related to strategic choice as proposed by a number of theories including our own (Neeman and Vulkan 2010). While costs (direct and indirect, via bid ask spreads) provide the most direct explanation of short term choices, the chapter finds that strategic theories do fit most of the medium to long term data. Understanding the incentives of traders to choose between competing designs in clearly of great importance for market designers. It is hoped that the evidence presented here can contribute to future successful designs.

Keywords:   financial exchanges, parallel trading mechanisms, market design, traders

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