Premium
Trading Mechanisms in Securities Markets
Author(s) -
MADHAVAN ANANTH
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04403.x
Subject(s) - order (exchange) , function (biology) , price formation , walrasian auction , price discovery , business , commerce , computer science , microeconomics , monetary economics , common value auction , economics , finance , auction theory , revenue equivalence , futures contract , evolutionary biology , biology
This paper analyzes price formation under two trading mechanisms: a continuous quote‐driven system where dealers post prices before order submission and an order‐driven system where traders submit orders before prices are determined. The order‐driven system operates either as a continuous auction , with immediate order execution, or as a periodic auction , where orders are stored for simultaneous execution. With free entry into market making, the continuous systems are equivalent. While a periodic auction offers greater price efficiency and can function where continuous mechanisms fail, traders must sacrifice continuity and bear higher information costs.