Dr. P.V. Viswanath

pviswanath@pace.edu

Market Design

© P.V. Viswanath, 2005

(Incomplete)

• Call Markets
• Dealer Markets

Call Market:

Advantages:

1. Limits the free trading option: The free trading option is
   limited for two reasons. First, since all orders will execute at the auction price, aggressive
   limit orders can be placed without fear of being picked off at those prices. Second,
   insofar as the auction is transparent and order may be revised, traders can adjust prices as
   they see other traders place orders and as they see new information.
2. Adverse information
   effects may also be reduced in a call auction insofar as investors are able to observe order
   placement prior to the final price determination. For example, observing a large order to
   sell will cause potential buyers to adjust their buy orders.
   

Dealer Markets:

Disadvantages:

1. Collusion: NASDAQ dealers colluded to set bid-ask spreads.

Issues:

1. Transparency
2. Ability to trade at any time
3. Ability to cancel orders
4. Anonymity
5. Automation
6. Tick Size
7. Order types