Trading Mechanisms in Securities Markets

  • Author(s): ANANTH MADHAVAN
  • Published: Apr 30, 2012
  • Pages: 607-641
  • DOI: 10.1111/j.1540-6261.1992.tb04403.x

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.

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