Microeconomic foundation of investment decisions for electronic security trading systems [Elektronische Ressource] / vorgelegt von Li Xihao

MicroeconomicFoundationof
InvestmentDecisionsforElectronic
SecurityTradingSystems

InauguraldissertationzurErlangungdesGradeseinesDoktors

derWirtschaftsswissenschaften(Dr.rer.pol.)anderFakulta¨t

fu¨rWirtschaftswissenschaftenderUniversita¨tBielefeld

vorgelegtvon

LiXihao,M.Sc.

May21,2010

FirstSupervisor:

SecondSupervisor:

Prof.Dr.JanWenzelburger
CentreforEconomicResearch
KeeleUniversity

Prof.Dr.HerbertDawid
DepartmentofEconomics
BielefeldUniversity

Contents

Introduction

1XetraAuctionMarketMechanism
1.1DemandandSupplySchedule....................
1.1.1Demand-to-buySchedule...................
1.1.2Supply-to-sellSchedule....................
1.2XetraAuctionPriceMechanism...................
1.2.1TradingVolumeandSurplus.................
1.2.2XetraAuctionPriceModel..................
1.3XetraAuctionAllocationMechanism................
1.3.1XetraAuctionAllocationModel...............
1.3.2PropertiesofXetraAuctionAllocationMechanism....

2ImprovementonAuctionPriceMechanism
2.1PropertiesofXetraAuctionPriceMechanism...........
2.2ImprovementonAuctionPricingRules...............
2.2.1EquivalentAuctionPricingRules..............
2.2.2ImprovedAuctionPricingRules...............

3InvestmentDecisioninXetraauctionmarket
3.1SecurityTradingProcess.......................
3.2XetraAuctionPriceandAllocation.................
3.2.1XetraAuctionPriceFunction................
3.2.2XetraAuctionAllocationFunction.............

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CONTENTS

3.3ExpectedXetraAuctionPriceandAllocation...........49
3.3.1ExpectedXetraAuctionPriceFunction...........50
3.3.2ExpectedXetraAuctionAllocationFunction........51
3.4PortfolioSelectionProblem.....................51
3.4.1ComputationalProcess....................52

4XetraAuctionMarketSystem59
4.1Agent-basedModellingofEconomicSystem............59
4.1.1ConstructiveAspectsofEconomicSystem.........60
4.1.2ConstructiveAspectsofActiveEconomicEntity......62
4.1.3ConstructiveAspectsofPassiveEconomicEntity.....65
4.1.4IntegrativeFrameworkforACEModelling.........65
4.2ACEModelofXetraAuctionMarketSystem...........66
4.3MarketExperiment..........................78
4.3.1ExperimentalSetup......................78
4.3.2ExperimentalProcedure...................81
4.3.3ExperimentalResults.....................82

5ConcludingRemarks

Acknowledgement

Bibliography

Appendices

98

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69

AComputationalProcessforXetraAuctionPricingRules97

BComputationalProcessforImprovedAuctionPricingRules99

CProofofProposition2.1

DProofofTheorem3.1

EResultsofStatisticalTest

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701

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OCTNNEST

Introduction

TheMasterstandingbyastream,said,‘Itpassesonjustlikethis,notceasingday
ornight!’—ChapterXVII,BookIX,ConfucianAnalects(Englishtranslation
byJamesLegge)

Inthelastcentury,oursocietyhasbeenexperiencingnewtidesoftechnological
revolutiontriggeredbyexplosiveapplicationofinformationandcommunication
technology.Theinnovationandapplicationofnewtechnologyinvokesprofound
inuencesontheevolutionofnancialmarkets.Sincethelastdecade,thead-
vancesofelectronicsecuritytradinghavebeenoneofthedominantcharacteristics
intheevolutionofnancialmarkets.Thecomprehensiveapplicationofelectronic
tradinginnancialmarketsforcesstockexchangestoadoptanewgenerationof
thesecuritytradingplatform-ElectronicSecurityTradingSystem,e.g.Xe-
tra(FrankfurtStockExchange),SETS(LondonStockExchange),andUniversal
TradingPlatform(NYSEEuronext).Securitymarketsinsomecountrieshave
beendominatedbyelectronicsecuritytradingsystems.Forexample,over90%
ofsecuritytransactionsinGermanyareexecutedbyXetraSystemoperatedby
FrankfurtStockExchange.
Therearethreemainadvantagesofusingelectronicsecuritytradingplatforms
insteadoftradingonconventionaloormarkets.First,electronicplatformspro-
videmorereal-timetradinginformationinthetradingprocess.Second,electronic
tradingplatformsaremoretransparentthanconventionaloormarkets.Secu-
ritypricesarestipulatedaccordingtowell-speciedtradingruleswhilemarket
makersinconventionaloormarketshaveconsiderableinuenceontheprice
determination.This‘black-box’argumentappliesinparticularforpriceswhich
arenegotiatedamongasmallnumberofdealers.Third,transactioncostsofelec-
tronicsecuritytradingplatformsareonaveragelowerthanthoseofconventional
oormarkets.

1

2

INTRODUCTION

Theseadvantagestogetherwiththecompetitionamongglobalstockexchanges
furtheracceleratetheprocessofestablishingelectronicsecuritytradingplatforms
inmanycountries.Forexample,withthereferencetotheelectronictrading
systemXetrainGermany,Chinahasstartedtolaunchanelectronictrading
platformcalledNewGenerationTradingSystems(NGTS).
Despitethepopularityofelectronicsecuritytradingsystems,littleisknownabout
themicroeconomicfoundationoftradingmechanismsinthesemarkets,e.g.see
Harris(1990),Huang&Stoll(1991),andO’Hara(1995).
Duetothelackofaproperformalizationoftradingmechanismsinelectronic
securitytradingsystems,eachelectronictradingplatformhasitsownsetoftrad-
ingrules,thus‘...itisneithereasynorusefultodescribehoweachtrading
mechanismworks.Butitispossibletodiscusstheoperationsofaspecicmecha-
nism,anddetail,atleastinprinciple,howmechanismofthattypeactuallywork.’
(O’Hara1995,p.9).Followingthisline,weconsideronespecicelectronicse-
curitytradingsystem,i.e.XetrasystemoperatedbyFrankfurtStockExchange.
TheocialbrochureGruppeDeutscheBo¨rse(2003)publishedbyFrankfurtStock
ExchangeprovidesacomprehensivedescriptionofXetramarketmodelwithan
explicitstipulationofcertaintradingrules.
AccordingtoGruppeDeutscheBo¨rse(2003),Xetraisanorder-drivensystem
inwhichtraderscantradesecuritieseitherintheformofcontinuoustradingor
intheformofXetraauctionbysubmittingcertaintypesoforderspecications
throughacomputerinterface.Acentralcomputersystemthencollectsorder
specicationsintoacentralorderbookanddeterminesthesecuritytradingprice
andthetradingvolumeaccordingtowell-speciedtradingrules.
TherearetwoordersizesinXetra,roundlotsandoddlots.Roundlotscorrespond
toaspeci