A simulation of a constrained securities market

Abstract

This paper presents a simulated environment of (i) a pure securities market and (2) a market containing a specialist constrained by selected trading rules of the New York Stock Exchange.The purpose of this paper is to consider the price stability attributes of order service, price variance and market efficiency (as defined) in these two short-run (stable) stochastic environments.After defining the simulation models, the paper examines the influence of the specialist in reducing order service time and the effect of these activities on the specialist's profit and liquidity positions.Market efficiency and price variance are examined by comparing the basic statistical characteristics of the resulting "time" series of prices produced by the two models in both the time and frequency domain.It is concluded that the specialist dramatically reduces order service time and price variance but that these are achieved only with some loss in market efficiency.It is also suggested that market efficiency is preserved by the existence of both the specialist and institutional constraints on his activities.