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Trading Mechanisms in Securities Markets

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  • Madhavan, Ananth

Abstract

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. Copyright 1992 by American Finance Association.

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  • Madhavan, Ananth, 1992. "Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    • Handle: RePEc:bla:jfinan:v:47:y:1992:i:2:p:607-41
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