Alternative Securities Trading Systems: Tests and Regulatory Implications of the Adoption of Technology
Authors: Clemons, Eric K.; Weber, Bruce W.
Journal: Information Systems Research (1996)
DOI: 10.1287/isre.7.2.163
<jats:p> Reasons for the mixed reactions to today's electronic off-exchange trading systems are examined, and regulatory implications are explored. Information technology (IT) could provide more automated markets, which have lower costs. Yet for an electronic trading system to form a liquid and widely used market, a sufficient number of traders would need to make a transition away from established trading venues and to this alternative way of trading. This transition may not actually occur for a variety of reasons. Two tests are performed of the feasibility and the desirability of transitions to new markets. In the first test, traders in a series of economic experiments demonstrate an ability to make a transition and develop a critical mass of trading activity in a newly opened market. In the second test, simulation is used to compare the floor-based specialist auction in place in most U.S. stock exchanges today to a disintermediated alternative employing screen-based order matching. The results indicate that reducing the role of dealer-intermediaries can actually diminish important measures of market quality. Our findings suggest that the low trading volumes on many off-exchange…