Comparative Analysis For The Price Forming Process Of Securities Markets Under Different Trading Mechanisms

Nowadays, the competition of securities markets is fierce. Our securities market has made great progress during more than ten years'development. But we still have problems in price forming mechanism, price stable mechanism and trade practice mechanism. To select proper trade mechanism is essential for the securities markets. Main securities markets in the world always improve their trade mechanisms in the long run to fulfill the development of securities markets. So according to our situation and combined with the developed countries'experience, it is very important to improve trade mechanism of securities market of our country. The paper analyses the effect of trade mechanisms on the price forming process of securities markets and innovation and development of trade mechanisms.The paper is based on Market Microstructure Theory and tries to explain the meaning and characteristic of trade mechanism of securities markets. The paper analyses the price forming process of securities markets under different trade mechanisms and compares the quality of securities markets under different trade mechanisms from several aspects, such as liquidity, efficiency and stability. According to the situation and problems of trade mechanism of our county's securities market and combined with the developed countries'experience, this paper makes some suggestions to improve our county's trade mechanism of securities market. The paper includes five parts.Part one is the conception of trade mechanism. This part introduces the meaning of trade mechanism and tries to explain the connections and differences among several basic conceptions, such as market structure, market microstructure, trade mechanism and price forming mechanism. Trade mechanism has macroscopic meaning and microcosmic meaning. Trade mechanism includes seven main formations: price forming process, the special aspect of price forming process, the form of the order and the mating rules, the separated formations of trade, price supervision mechanism, trade information exposure and trade payment mechanism. The paper mainly analyses price forming process.Part two is the explanation of Market Microstructure Theory and correlated analysis. This part introduces Market Microstructure Theory and the correlated analysis both domestic and abroad. This part is focusing on Inventory-control Theory and Incomplete-information Theory and the correlated analysis in our country and abroad. Inventory-control Theory analyses the connections between bid-ask spread and inventory cost of market maker. The characteristic of it is using trade cost to interpret bid-ask spread. In Inventory-control Theory, all traders and market maker are Uninformed Trader. They have same information and expect. From the development of Inventory-control Theory, it includes Garman model, Stoll model and Ho-Stoll model. These models have different analysis aspects. The same part of them is that they assume the order is uncertain. So market maker may have inventory problems and traders may have execution problems. Incomplete-information Theory uses information cost to interpret bid-ask spread. From the development of Incomplete-information Theory, it includes Sequential trade model, Expand sequential trade model, Kyle's trade model. Compare with Inventory-control Theory, Incomplete-information Theory has many advantages. It uses incomplete information to interpret pricing. So even if in a no friction market ,it also has bid-ask spread. It can also infers the strategy of Informed Trader and Uninformed Trader. Based on above theory, scholars abroad make experience proof with real data. Study on Market Microstructure Theory started relatively late in our country and almost on theory analysis. Studies are most on some aspects of the securities market's efficiency. The studies of experience proof which only on effect of trade mechanism on pricing are rare.Part three is the price forming process under different trade mechanisms and the efficiency of the market. First, this part introduces the basic characteristic and trade rules of Quote-driven System and Order-driven System and Mixed-driven System. Then, the paper analyses the price forming process of Quote-driven System and Order-driven System. The function of trade mechanism is transfer potential supply and demand of investors to real trade. In this process, price forming is key. The function of different trade mechanisms is different in price forming process. Each trade mechanism is different in permitted order style, time that trade may happen, speed and quantity and quality of market information that investors may have when they submit their order and the dependent on the liquidity that market maker provide. Next, this part introduces the design objectives of the trade mechanism. The main design objectives of the trade mechanism are liquidity, transparency, stability, efficiency, transaction cost, safety. The paper compares Order-driven System and Quote-driven System and Mixed-driven System from different aspects of liquidity, efficiency and stability.Part four is the analysis of trade mechanism of international securities markets. This part is focusing on the trade mechanisms of New York Stock Exchange, London Stock Exchange, Euronext and Hong Kong Stock Exchange. Then, the paper analyses the trade mechanisms of main international securities markets. From the developed counties'experience of trade mechanism of securities markets, we can find that auction trade mechanism with Liquidity Provider becomes a trend. Markets that only use market maker mechanism at first introduce action trade mechanism. Meanwhile, markets that only use auction mechanism at first introduce Liquidity Provider. Each stock exchange regulates the limits of market maker mechanism according to liquidity and introduces related measures to encourage market makers to involve in make market. Experiences prove those auction trade mechanisms which with Liquidity Provider have greatly improved the depth and liquidity of securities markets.Part five is the problems in our trade mechanism and the paper also makes some suggestions to improve the market trade mechanism. This part analyses the situation of trade mechanism of our country's securities market and the challenge we faced. From price forming mechanism, we use Order-driven System. This trade mechanism is proper for securities which have high liquidity, but it is not proper for securities which have low liquidity. Because of lack of liquidity, the market may in low trading quantity. From price stable mechanism, nowadays, we use different limits of rise and decline on different securities in our securities market. But in practice, rise and decline limits restrain more in price rising than in price decline. From trade practice mechanism, we have not use T+0 on stock now. It is useful to active market and improve the efficiency of market pricing. The paper also makes some suggestions to improve the trade mechanism of our country's securities market from price forming mechanism, price stable mechanism and trade practice mechanism. From price forming mechanism, because different securities in our securities market have large distinction in liquidity and volatility, so use different market styles and different trade mechanisms to reflect the trade demand of different securities and investors is necessary. From price stable mechanism, we can consider to rescind the rise and decline limits on securities stage by stage and at last use circuit breaker of securities market to instead. From trade practice mechanism, we can consider to use T+0 gradually. First, we can use T+0 on securities which have high liquidity. Then use it on securities which have low liquidity and high volatility when the institutional investors become a certain proportion in securities market and the opinion of invest becomes mature. At last, we can use T+0 in all the securities.