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Upending Stock Market Structure Using MPC
CHARANJIT S. JUTLA
IBM RESEARCH
Talk Outline•What exactly is the purpose of the stock market?
•Is there a problem with the stock market?
•Demand and Supply (Eco-101)
•Modeling (Private) Information in Equilibrium Pricing
•Price Discovery Mechanisms
•Novel (or antiquated) Structure of Stock Market
•Illustrative Analysis
Stock Market Purpose Price Discovery
◦ Important for investment decisions◦ Effectively centralizes distributed information
Liquidity – it is a market! NYSE vs NASDAQ (Double Auctions)
Is there a problem?◦ What’s with all the day traders and HFT? Liquidity?◦ Trusting the Specialist to hide your bids?◦ Let’s Model
Walrasian Equilibrium (1877)
Walrasian Equilibrium
Grossman-Stiglitz Critique (1980)
Impossibility of Informationally efficient markets◦ Efficient Markets Hypothesis – Prices reflect all the information◦ Even “Informed” Traders “Private” Information?◦ Then informed traders have no incentive.◦ So, in “equilibrium” no one is doing any research!◦ But, that is not an equilibrium!◦ CONCLUSION: Prices do not reflect all the information.
Easley-O’Hara Model (2004)
price
Cumulative Demand and Supply
BUYSELL
Market price buyMarket price sell
CLEARING PRICEDOUBLE AUCTION
(CPDA)
price
Cumulative Demand and Supply
price
Cumulative Demand and Supply
s
Upshot If there is no private signal, or “signal” is public knowledge:
◦ converges to Walrasian equilibrium.◦ incentivizes “uninformed”.
Private Information is clearly not revealed till auction is over.◦ Informed are further incentivized.◦ Uninformed continue to get a return (so liquidity providers remain).◦ If everyone does research, faster equilibrium pricing!
Open Questions?◦ Mostly Finance Questions. ◦ But, Additional Leakage - Performance Tradeoffs.◦ Treating Buyers and Sellers symmetrically in analysis.◦ Volume reveals signal after auction is over in simple model.◦ Periodic CPDA.
THANKS!