Evidence on Trading Mechanisms

Abstract

This chapter is divided into three main sections. Section 5.1 addresses the question of whether the FSA should require trading systems to use a particular trading mechanism (e.g. dealer or auction, floor or screen); or ban the use of specified trading mechanisms. In particular, it investigates whether different assets or types of client require different trading mechanisms. If this is the case, the FSA might require that a specified trading mechanism be used (or banned) for trading certain types of asset, or for trading by particular types of client. Apart from some empirical evidence on floor versus screen, this section is largely theoretic. The answers to these questions have implications for the issue of fragmentation because rival systems trading the same security may be using different trading mechanisms. Such differences in trading mechanism may cause variations in the quality of trading services provided in parts of a fragmented market.