Trading Mechanisms in Securities Markets

Ananth Madhavan

Journal of Finance, 1992, vol. 47, issue 2, 607-41

Abstract: This paper analyzes price formation under two trading mechanisms: a continuous quote-driven system where dealers post prices before order submission and an order-driven system where traders submit orders before prices are determined. The order-driven system operates either as a continuous auction, with immediate order execution, or as a periodic auction, where orders are stored for simultaneous execution. With free entry into market making, the continuous systems are equivalent. While a periodic auction offers greater price efficiency and can function where continuous mechanisms fail, traders must sacrifice continuity and bear higher information costs. Copyright 1992 by American Finance Association.

Date: 1992
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