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Exchange Design and Efficiency

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  • Marzena Rostek
  • Ji Hee Yoon

Abstract

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 independent clearing across assets (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 the prices of all assets). Additional trading protocols for traded assets—neutral when the market clears jointly—are generally not redundant innovations, even if all traders participate in all protocols. Multiple trading protocols that clear independently can be designed to be at least as efficient as joint market clearing for all assets. The change in price impact brought by independence in market clearing can overcome the loss of information, and enhance diversification and risk sharing. Except when the market is competitive, market characteristics should guide innovation in trading technology.

Suggested Citation

  • Marzena Rostek & Ji Hee Yoon, 2021. "Exchange Design and Efficiency," Econometrica, Econometric Society, vol. 89(6), pages 2887-2928, November.
    • Handle: RePEc:wly:emetrp:v:89:y:2021:i:6:p:2887-2928
    DOI: 10.3982/ECTA16537
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    References listed on IDEAS

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    Cited by:

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    3. Anthropelos, Michail & Kardaras, Constantinos, 2024. "Price impact under heterogeneous beliefs and restricted participation," Journal of Economic Theory, Elsevier, vol. 215(C).
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    5. Ari Kutai & Daniel Nathan & Milena Wittwer, 2024. "Exchanges for government bonds? Evidence during COVID-19," Bank of Israel Working Papers 2024.03, Bank of Israel.
    6. Simone Alfarano & Albert Banal-Estañol & Eva Camacho & Giulia Iori & Burcu Kapar & Rohit Rahi, 2024. "Centralized vs Decentralized Markets: The Role of Connectivity," Working Papers 1420, Barcelona School of Economics.

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