Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior

Marco LiCalzi, Lucia Milone () and Paolo Pellizzari
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Lucia Milone: University of Venice

A chapter in Computational Methods in Economic Dynamics, 2011, pp 5-28 from Springer

Abstract: 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.

Keywords: Equilibrium Price; Allocative Efficiency; Transaction Price; Market Designer; Cancellation Rate (search for similar items in EconPapers)
Date: 2011
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Working Paper: Allocative efficiency and traders' protection under zero intelligence behavior (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-642-16943-4_2

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DOI: 10.1007/978-3-642-16943-4_2

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