Why trading with limits is preferred over typical auctions

Update June 2016
Historic Volume Surge Forces Deutsche, Morgan Stanley To Shut Down Dark Pools:

 The first hour was pretty horrific… prices were just bouncing around, stocks struggling to open.

Obviously this trading method is not robust. Otherwise there would be no comments like that. A properly designed order execution method should work well as long as there is electricity. At worst, it might execute trades slowly, like when a UNIX machine gets bogged down. But all those trades should still execute flawlessly based on each order’s stipulations.


Topic CP Limit Method Typical auction Method Typical stock Method
Price risk Lower risk. Both parties control the price they are willing to trade at. And the limit prices bracket the probable tansaction price. Higher risk. The transaction price can vary a lot. Lower risk. Except when using market orders.
Time risk Lower risk. Both parties control their time window. Higher risk. The choices are typically between now, and 10 days. Lower risk. Both parties can control their time window.
Transaction fees Low. Market will set the price based on CP profit margin. Higher: 2-13%. (“insurance” is bundled in) Medium (“regulation” that fails is bundled in) It costs about $0.45 to trade 1,000 shares of a $25 stock.
Conflict resolution Better since items are diss-aggregated. Local participants with near direct knowledge of the situation, and high value ratings, decide quickly. Also, insurance is handled directly be competing insurance sellers. Aggregated in the transaction fee. Decisions come from auction employees wich is relatively indirect. A corrupt joke.
Pricing management If a buyer or seller wants to trade about 10 items per day CP will automatically set the price so that supply and demand balances out at about 10 items per day. Not available as far as I can tell. Great.
Securitization Better. Apples can be compared to apples. A resource is listed by a short descirption that describes about 75% of the resource. Optionally the condition is added, and number for sale, etc. When somenoe searches, they are really using the description “and” the condition, etc. Basically items are group which increases simplicity Poor. Currently there are over 18 listing for Harry Potter’s complete 7 book set. Min price is $2, max price is $212, average is 49, median is 32, and standard devaition is 49! That is price discovery? Great.
Price depth Great. Poor. Just guestimate. Great.
Shill bidding Immune. Once an oder is in, it’s live for at least 2 transaction cycles. Not immune 🙂 A corrupt joke.
Order execution Orders are checked to see limit prices overlap every 6 seconds, and orders persist for at least 2 trade windows. This enables people to “compete” with computers, and keeps infrastructure costs low. Typical auction: in inflexible steps between now and 10 days. Stock markets: any nanosecond means expensive computers and a constant race to trade faster. Even though “high frequency trading” is against the rules, those rules are not enforced.
Issuing stock When an event is created, stock, in the form of ownership percent, is issued. “Stock” can then be offered for sale like anything else. NA Andy Kessler’s book Wall Street Meat notes it costs about 7% to go public. Pricing the stock and determining the float is rather arbitrary. Why not let the market decide?

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s