Exchange Design and Efficiency
49 Pages Posted: 12 Jun 2020
Date Written: May 19, 2020
Most assets clear independently rather than jointly. This paper presents a model based on the uniform-price double auction which accommodates arbitrary restrictions on market clearing, including asset by asset market clearing (allowed when demand for each asset is contingent only on the price of that asset) and joint market clearing for all assets (required when demand for each asset is contingent on prices of all assets). Introducing additional trading protocols for traded assets - neutral when the market clears jointly - or linking existent trading protocols are generally not redundant innovations, even if all traders participate in all protocols. Multiple protocols that clear independently can always be designed to be at least as efficient as joint market clearing for all assets. Separation in market clearing can enhance diversification and risk sharing. When traders have price impact, regulation of innovation in trading technology should be guided by market characteristics.
Keywords: Imperfectly competitive market, Trading technology, Market design, Innovation, Decentralized market, Liquidity, Price impact, Uniform-price auction, Efficiency
JEL Classification: D47, D53, G11, G12
Suggested Citation: Suggested Citation