Research On Order Book Disclosure And Tick Size In Order-driven Market Based On Agent-based Computational Finance

More and more exchanges in the world introduce order-driven market. Many traditional markets with market makers are gradually being replaced by electronic order-driven markets, which operate faster and cost lower. As order-driven market is quite different from other markets, the research on market microstructure of order-driven market is necessary and important. Order book disclosure and tick size is an important part of market microstructure. This paper systematically reviewed the previous studies on order book disclosure and tick size, found that although those papers have some significative results, but no agreement had been concluded. This paper found that researchers did not fully consider the market environment such as traders'character and information is the main reason for this phenomenon. So this paper will research on market microstructure in a specific market environment. And based on previous studies, this paper introduces agent-based computational finance, studies market order book dynamic process and the emergence of the macroscopic characteristics of the market in different markets based on order-driven market.In order to study different market environment, this paper constructs two types of markets. The first one is market with liquidity-motivated traders. There is no information in the market, and liquidity-motivated traders differ in waiting cost. And with different structure of traders, there are three markets, impatient market, moderate market and patient market. The other one is market with information, which is composed of information-motivated traders and liquidity-motivated traders. Based on these models, this paper researches the transaction costs, traders behavior, market characteristics and price discovery in different markets with different order book transparency and tick size.This paper's results support previous studies such as Harris (1994), Madhavan, Porter and Weaver (2005) and Bessembinder (2009) as a whole. Our result shows that certain market conditions has great impact on the effect of order book disclosure and Tick size. As for markets with liquidity-motivated traders, the impatient market is different from the patient market and the moderate market because the traders who provide liquidity are more than the other two markets. In the experiment of the markets with information, we found that the change of order book disclosure and tick size impacts on price discovery and information transmission. So the orders submitted by information-motivated traders for arbitrage are different, which affects the dynamic of market order book and dealer behavior as well as macroscopic characteristics of the market. So we should take into account the market's character such as information structure and traders attribute when designing market microstructure, in order to accurately measure the effect of the market microstructure on the market. After that, the design of market microstructure mechanism can adapt itself to different markets'conditions.In practice, many markets in the world mainly tend to increase order book disclosure and reduce tick size. Based on this study, we find that order book disclosure and the tick size has complex impact on market. Only increasing order book disclosure and reducing tick size may not promote the development of financial market. And market microstructure will affect market differently in different market environment. So when we study market microstructure, the market environment and the structure of traders should be defined firstly. Then we can measure the impact of market microstructure on a special market exactly. Therefore when designing market rules, Chinese market regulators should first consider the characteristics of our market, and then learn foreign experience. After that, we can constitute new regulations accord with Chinese market's condition and promote Chinese financial market to develop rapidly and healthily.