Access Restriction

Author Janeček, Karel ♦ Kabrhel, Martin
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Abstract Abstract. The aim of this paper is to analyze different kinds of trade matching algorithms. The matching (or trade allocation) algorithm is an important part of an exchange trading mechanism. We begin with an overview of the matching algorithms currently used at the biggest world derivatives exchanges. Then we analyze the impact of these algorithms on the strategy of a rational trader, and derive implications of the induced trader’s behavior for the overall market efficiency. Our special focus is on the Time Pro-Rata algorithm introduced by Euronext.LIFFE in 2007 for the short-term interest rate futures contracts. Using rigorous mathematical models, we discuss how the optimal trading strategy should look like, and point out a number of unusual properties of this strategy. The obtained results might be interesting not only from the theoretical point of view, but also for a practical trader. Our analysis implies that the Time Pro-Rata algorithm substantially complicates decision making, and, more importantly, induces individually rational trader’s behavior that is inconsistent with the general market efficiency. Keywords: Pro-Rata algorithm, Price/Time algorithm, international derivative exchanges, efficiency of financial markets, Time Pro-Rata algorithm
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article
Publisher Date 2007-01-01