Allocative efficiency and traders' protection under zero intelligence behavior
AbstractThis paper studies the continuous double auction from the point of view of market engineering: we tweak a resampling rule often used for this exchange protocol and search for an improved design. We assume zero intelligence trading as a lower bound for more robust behavioral rules and look at allocative efficiency, as well as three subordinate performance criteria: mean spread, cancellation rate, and traders' protection. This latter notion measures the ability of a protocol to help traders capture their share of the competitive equilibrium profits. We consider two families of resampling rules and obtain the following results. Full resampling is not necessary to attain high allocative efficiency, but fine-tuning the resampling rate is important. The best allocative performances are similar across the two families. However, if the market designer adds any of the other three criteria as a subordinate goal, then a resampling rule based on a price band around the best quotes is superior.
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Bibliographic InfoPaper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 168.
Length: 24 pages
Date of creation: Oct 2008
Date of revision: Nov 2009
Publication status: Published in H. Dawid and W. Semmler (eds.), Computational Methods in Economic Dynamics, Springer, 5-28
market engineering; trading protocols; competitive share; exchange market;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-28 (All new papers)
- NEP-EXP-2008-10-28 (Experimental Economics)
- NEP-MST-2008-10-28 (Market Microstructure)
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