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Alternative Securities Trading Systems: Tests and Regulatory Implications of the Adoption of Technology

Author

Listed:
  • Eric K. Clemons

    (Department of Operations and Information Management, Steinberg Hall-Dietrich Hall 1300, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6366)

  • Bruce W. Weber

    (Department of Information Systems, Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012-1126)

Abstract

Reasons for the mixed reactions to today's electronic off-exchange trading systems are examined, and regulatory implications are explored. Information technology (IT) could provide more automated markets, which have lower costs. Yet for an electronic trading system to form a liquid and widely used market, a sufficient number of traders would need to make a transition away from established trading venues and to this alternative way of trading. This transition may not actually occur for a variety of reasons. Two tests are performed of the feasibility and the desirability of transitions to new markets. In the first test, traders in a series of economic experiments demonstrate an ability to make a transition and develop a critical mass of trading activity in a newly opened market. In the second test, simulation is used to compare the floor-based specialist auction in place in most U.S. stock exchanges today to a disintermediated alternative employing screen-based order matching. The results indicate that reducing the role of dealer-intermediaries can actually diminish important measures of market quality. Our findings suggest that the low trading volumes on many off-exchange systems do not result from traders' inability to break away from established trading floors. Rather, today's off-exchange trading systems are not uniformly superior to the trading mechanisms of traditional exchanges. Thus, regulatory actions favoring off-exchange trading systems are not warranted; but, improved designs for IT-based trading mechanisms are needed, and when these are available, they are likely to win significant trading volume from established exchanges.

Suggested Citation

  • Eric K. Clemons & Bruce W. Weber, 1996. "Alternative Securities Trading Systems: Tests and Regulatory Implications of the Adoption of Technology," Information Systems Research, INFORMS, vol. 7(2), pages 163-188, June.
    • Handle: RePEc:inm:orisre:v:7:y:1996:i:2:p:163-188
    DOI: 10.1287/isre.7.2.163
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    Citations

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    Cited by:

    1. Hans Ulrich Buhl, 2000. "Efficient Coordination by Optimal Allocation of Decision Rights for Participants on Electronic Financial Services Markets," Computational and Mathematical Organization Theory, Springer, vol. 6(2), pages 145-159, July.
    2. Eric Overby & Sandy Jap, 2009. "Electronic and Physical Market Channels: A Multiyear Investigation in a Market for Products of Uncertain Quality," Management Science, INFORMS, vol. 55(6), pages 940-957, June.
    3. Morgan, John & Hossain, Tanjim & Minor, Dylan, 2009. "Do All Markets Ultimately Tip? Experimental Evidence," Department of Economics, Working Paper Series qt4nw230qt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Anuja Hariharan & Marc Thomas Philipp Adam & Timm Teubner & Christof Weinhardt, 2016. "Think, feel, bid: the impact of environmental conditions on the role of bidders’ cognitive and affective processes in auction bidding," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(4), pages 339-355, November.
    5. Wendy Currie & Jonathan Jm Seddon, 2022. "Exploring technological instantiation of regulatory practices in entangled financial markets," Post-Print hal-03599145, HAL.
    6. Qiu-Hong Wang & Kai-Lung Hui, 2017. "Technology Mergers and Acquisitions in the Presence of an Installed Base: A Strategic Analysis," Information Systems Research, INFORMS, vol. 28(1), pages 46-63, March.

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