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Yet Another Trading Simulation: The nonimmediacy Model

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Author Info

  • Jeyasreedharan, Nagaratnam

    (School of Economics and Finance, University of Tasmania)

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    Abstract

    Market participants who want to trade “quickly” demand transactional liquidity. Market participants who demand to trade “immediately” demand transactional immediacy. Traders supply immediacy when the trading returns are high and demand immediacy when the trading returns are low. Traders supply immediacy by being non-immediate and traders demand immediacy by being immediate. As these time-based expectations are functions of the underlying distributions of the clearing prices, one is able to define exact analytical functions for time-differing non-immediacy traders. As non-immediacy is heterogenous, a range of non-immediacy traders with differing non-immediacies can compete in the marketplace and give rise to a “zone” of limit order functions. The bid-ask expectations are also assumed to be rank-dependent to maintain transitivity and monotonicity. The limit orders placed by non-immediacy traders can then be “picked” off by immediacy traders as they arrive at the exchange. A simulation of a simple trading model is undertaken to illustrate the mechanism of price formation under rank-dependent non-immediacy trading. In doing so, we show that immediacy is a consequence of non-immediacy trading and is provided freely in any organised asset markets when participants transmit their demand propensities to the market in the form of limit orders. While certain participants such as dealers and specialists do indeed (at a price) provide immediacy, they need not be the only providers.

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    File URL: http://eprints.utas.edu.au/3156/
    File Function: First version, 2007
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    Bibliographic Info

    Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 3156.

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    Length: 31 pages
    Date of creation: 2007
    Date of revision:
    Publication status: Published by University of Tasmania, School of Economics & Finance - Report (Discussion Paper) 2007
    Handle: RePEc:tas:wpaper:3156

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    Related research

    Keywords: REPEC; Immediacy; Nonimmediacy trading; Rank-dependent;

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