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Automating the Price Discovery Process: Some International Comparisons and Regulatory Implications

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  • Mr. Ian Domowitz

Abstract

Automated trade execution systems are examined with respect to the degree to which they automate the price discovery process. Seven levels of automation of price discovery are identified, and 47 systems are classified according to these criteria. Systems operating at various levels of automation are compared with respect to age, geographical location, and type of securities traded. Information provided to market participants, and asymmetries of information between traders with direct access to the automated market and outside investors also are examined. It is found, for example, that the degree of asymmetric information increases with the level of automation of price discovery. The potential for trading abuses related to prearranged trading, noncompetitive execution, and trading ahead of customers is analyzed for each level of automation. Certain levels of automation widen the opportunities for trading abuses in some respects, but may narrow them in others.

Suggested Citation

  • Mr. Ian Domowitz, 1992. "Automating the Price Discovery Process: Some International Comparisons and Regulatory Implications," IMF Working Papers 1992/080, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1992/080
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    References listed on IDEAS

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    1. Domowitz, Ian, 1993. "A taxonomy of automated trade execution systems," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 607-631, December.
    2. Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 29-60, January.
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    Cited by:

    1. Albuquerque, Paula C., 2003. "The Traditional Brokers: What are their Chances in the Forex?," Journal of Applied Economics, Universidad del CEMA, vol. 6(2), pages 1-16, November.
    2. Xu, Cheng Kenneth, 2000. "The microstructure of the Chinese stock market," China Economic Review, Elsevier, vol. 11(1), pages 79-97.
    3. Eldor, Rafi & Hauser, Shmuel & Pilo, Batia & Shurki, Itzik, 2006. "The contribution of market makers to liquidity and efficiency of options trading in electronic markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2025-2040, July.
    4. Yue‐cheong Chan, 2005. "Price Movement Effects on the State of the Electronic Limit‐Order Book," The Financial Review, Eastern Finance Association, vol. 40(2), pages 195-221, May.
    5. Grammig, Joachim & Schiereck, Dirk & Theissen, Erik, 2001. "Knowing me, knowing you: : Trader anonymity and informed trading in parallel markets," Journal of Financial Markets, Elsevier, vol. 4(4), pages 385-412, October.
    6. Ulibarri, Carlos A., 2004. "Introducing contemporaneous open-outcry and e-trading at the Chicago Board of Trade," MPRA Paper 14821, University Library of Munich, Germany.
    7. Asani Sarkar & Michelle Tozzi, 1998. "Electronic trading on futures exchanges," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Jan).
    8. Griffiths, Mark D. & Smith, Brian F. & Turnbull, D. Alasdair S. & White, Robert W., 1998. "Information flows and open outcry: evidence of imitation trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(2), pages 101-116, June.
    9. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
    10. Grammig, Joachim & Wellner, Marc, 2002. "Modeling the interdependence of volatility and inter-transaction duration processes," Journal of Econometrics, Elsevier, vol. 106(2), pages 369-400, February.

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