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Allocative efficiency and traders' protection under zero intelligence behavior

Author

Listed:
  • Marco LiCalzi

    () (Department of Applied Mathematics, University of Venice)

  • Lucia Milone

    () (Advanced School of Economics, University of Venice)

  • Paolo Pellizzari

    () (Department of Applied Mathematics, University of Venice)

Abstract

This 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.

Suggested Citation

  • Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2008. "Allocative efficiency and traders' protection under zero intelligence behavior," Working Papers 168, Department of Applied Mathematics, Università Ca' Foscari Venezia, revised Nov 2009.
  • Handle: RePEc:vnm:wpaper:168
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    File URL: http://virgo.unive.it/wpideas/storage/2008wp168.pdf
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    References listed on IDEAS

    as
    1. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading without Resampling," Working Papers 164, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    2. Mirowski, Philip, 2007. "Markets come to bits: Evolution, computation and markomata in economic science," Journal of Economic Behavior & Organization, Elsevier, vol. 63(2), pages 209-242, June.
    3. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
    4. LiCalzi, Marco & Pellizzari, Paolo, 2007. "Simple market protocols for efficient risk sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3568-3590, November.
    5. Hurwicz, Leonid & Radner, Roy & Reiter, Stanley, 1975. "A Stochastic Decentralized Resource Allocation Process: Part I," Econometrica, Econometric Society, vol. 43(2), pages 187-221, March.
    6. Zhan, Wenjie & Friedman, Daniel, 2007. "Markups in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2984-3005, September.
    7. Gode, Dhananjay (Dan) K. & Sunder, Shyam, 2004. "Double auction dynamics: structural effects of non-binding price controls," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1707-1731, July.
    8. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
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    10. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics,in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011 Elsevier.
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    Cited by:

    1. Roberto Cervone & Stefano Galavotti & Marco LiCalzi, 2009. "Symmetric Equilibria in Double Auctions with Markdown Buyers and Markup Sellers," Working Papers 187, Department of Applied Mathematics, Università Ca' Foscari Venezia.

    More about this item

    Keywords

    market engineering; trading protocols; competitive share; exchange market;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - 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

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