Portfolio Trading and Electronic Networks

Abstract

Investors prefer to hold diversified combinations of assets. We take this dictum seriously and propose a bundle trading mechanism that would allow investors to trade diverse combinations of assets. The portfolio trading market is designed as an order-driven process where traders submit sealed orders. A mathematical algorithm is used to continuously match orders listed in a closed limit order book. This system is contrasted with existing systems which clear trades separately for each asset. We argue that efforts to develop complex clearing systems can be viewed as a part of an ongoing trend to exploit electronic networks to design trading systems that reflect the needs of the investment community.

JEL Classification: G10, G11, C70, D44