Allocative efficiency and traders' protection under zero intelligence behavior

Marco LiCalzi, Lucia Milone () and Paolo Pellizzari

No 168, Working Papers from Department of Applied Mathematics, Università Ca' Foscari Venezia

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: market engineering; trading protocols; competitive share; exchange market (search for similar items in EconPapers)
JEL-codes: C63 C92 D40 D51 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-10, Revised 2009-11
New Economics Papers: this item is included in nep-exp and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in H. Dawid and W. Semmler (eds.), Computational Methods in Economic Dynamics, Springer, 5-28

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Related works:
Chapter: Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior (2011)
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