The design and analysis of an alternative web-based allocation mechanism for financial instrument trading and electricity trading

Abstract

The explosion of Internet-based commerce significantly changes the way business is done and creates a huge demand for efficient market mechanism design. The purpose of this study is to design online trading systems focusing on economic characteristics. This study explores the development of an Internetbased auction institution with a novel matching and execution mechanism. Our research points to a more powerful intermediary model enabled by rapidly developed computing systems, and aims to formulate a basic theoretic framework for the design of future electronic markets. The new market mechanism is analyzed from various perspectives: Pareto-optimality, allocation of trade surplus in various market setting, market liquidity and the asymptotic incentive compatibility of the proposed market mechanism are studied. vi The second part of my dissertation is to apply the model to different electronic commerce settings. A new financial intermediation model is developed to implement an electronic centralized exchange market to trade heterogeneous options written on non-traded assets. This work contributes to the financial intermediation theory by specifying how the intermediary would take advantage of the new technology to achieve lower cost. This study also investigates the application of the proposed new market model to the deregulated electricity market redesign and reengineering, which can solve the inefficient dispatch and congestion caused by the exposure risk when electricity and transmission are traded in separate markets.