market architecture of selected stock exchanges in ... - Gilles Daniel

31“trading imbalance” 27 is a call auction, which determines the reopening price, afterwhich continuous trading proceeds.3.5 Electronic vs. Floor TradingThe market architecture designates the set of rules governing the trading process.One attribute affecting the market structure is the degree of automation. Marketsvary considerably in the extent of automation. Two opposite extremes can beidentified (see Table 12): centralized floor trading (= open outcry) and decentralizedelectronic trading (Madhavan 2002).Table 12: Key Institutional Differences between Floor and Electronic TradingKey Institutional Differences between Floor Trading and Electronic TradingInstitutional Feature Floor ElectronicLocationTrading takes place on the trading floor ofthe exchangePresence at the exchange not obligatoryIdentity of counterparty Known before the trade Usually revealed after the deal is closed although afew exchanges display broker identity beforeTransparency of availableliquidityUsually only the best bid and offer is knownto traders before orderingUsually the top-five best buy and sell prices(sometimes the whole book) are displayed ontraders’ screensPlacement of orders Via the floor traders Sent to a central computer, which places the orderin the order bookSpeed of matching tradesor immediacyOperating cost and orderprocessing costsSpeed and cost ofsettlementOrder bookTrades are matched manually based on anopen-outcry system and take from 10seconds to several minutesHigherSettlement is often paper-based, with aconsiderable lagOften does not exist; quotes are valid only aslong as “breath is warm”Source: Jain (2005) and own modificationTrades are matched automatically by a computeralgorithm within one secondLowerUsually faster, dematerialized settlement andlower costsMatches or accumulates customers’ limit orders;quotes are valid until withdrawnModern stock exchanges compete aggressively for trading activity and investorinterest. Therefore, the exchanges introduce technology to enhance their markets. Inthe past few years, technology has accelerated the speed, with which orders aresubmitted and translated into trades. Moreover, it has improved communication, andthus information. Speed and connectivity are the most obvious arguments for thegrowth of technology supporting order routing as well as clearing and settlement.27 “Trading imbalance” is according to Campbell (1988, p.305) every situation where it comes to anexcess of offers to buy or sell an asset