The Design of Financial Markets

Trading in financial markets follows particular protocols and is subject to various rules. As regulation and technology evolve, market design is also changing, and financial economists attempt to distinguish desirable from undesirable features and come closer to optimal structures and mechanisms. This issue of FTG Insights highlights four new perspectives on tradeoffs in the design of financial markets. “Simultaneous Multilateral Search” shows that the move from bilateral bargaining to simultaneous multilateral search in over-the-counter markets might not always be desirable, and even when it is desirable, might face frictions in adoption, which is consistent with what has been observed in practice. “Competition and Information Leakage” analyzes how the concern about information leakage and front running leads investors in over-the-counter markets to limit the number of potential counterparties they contact and the information they disclose, discussing how these forces should be taken into account in the way markets are designed. “Secret and Overt Information Acquisition in Financial Markets” discusses the incentives of investors to reveal information about their information-acquisition activities, such as corporate site visits, and shows that sometimes disclosure of such information should be mandatory given that investors’ incentives do not align with efficiency. “Due Diligence” focuses on the practice of gathering information by the buyer after an offer has been accepted by the seller with the possibility in mind of not moving forward with the transaction, showing that allowing for due diligence is beneficial even though due diligence tends to be excessive.