Bridge over ocean
1 January 1994 Financial Analysts Journal Volume 50, Issue 1

Electronic Trading, Market Structure and Liquidity

  1. Marcel N. Massimb
  2. Bruce D. Phelps, CFA
Electronic trading markets have been deployed to replace or complement traditional, open-outcry markets. The "electronic matching system" automatically matches bids and offers at the same price. Exchanges, regulators and investors evaluating the relative merits of open outcry and electronic matching should note, however, that the trading environment and the trade-matching algorithm embedded in electronic matching fail to capture those features of open outcry that account for its success and liquidity. While electronic matching systems offer investors some valuable operational efficiencies, they do not provide the liquidity investors demand and expect. Any decision to move from open outcry to electronic matching thus means a tradeoff between efficiency and liquidity. Instead, application of technology to the open-outcry system could allow it to approach the operational efficiency of electronic matching while maintaining the liquidity advantage.
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