## Automating the Price Discovery Process: Some International Comparisons and Regulatory Implications

_IMF Working Papers, October 1, 1992_

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## Bibliographic details
- Authors: Ian Domowitz
- Published: October 1, 1992
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850253.001

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### Summary
- Automated trade execution systems are examined with respect to the degree to which they automate the price discovery process.
- Seven levels of automation of price discovery are identified.
- 47 systems are classified according to these criteria.
- Systems operating at various levels of automation are compared with respect to age, geographical location, and type of securities traded.
- Information provided to market participants, and asymmetries of information between traders with direct access to the automated market and outside investors, are examined.
- It is found that the degree of asymmetric information increases with the level of automation of price discovery.
- The potential for trading abuses related to prearranged trading, noncompetitive execution, and trading ahead of customers is analyzed for each level of automation.
- Certain levels of automation widen the opportunities for trading abuses in some respects, but may narrow them in others.

### Key findings and observations
- Seven distinct levels of automation of price discovery are identified (levels described in the source).
- 47 automated trade execution systems are classified by these levels.
- Comparative dimensions assessed:
  - Age of systems.
  - Geographical location (including North America as a listed subject/keyword).
  - Type of securities traded (Stocks, Futures, Options).
- Information asymmetry:
  - Degree of asymmetric information increases with the level of automation of price discovery.
  - Differences in information provided to market participants are examined, including asymmetries between traders with direct access to the automated market and outside investors.
- Trading-abuse vulnerabilities:
  - Potential abuses analyzed include prearranged trading, noncompetitive execution, and trading ahead of customers.
  - Analysis is conducted for each level of automation, noting that some automation levels widen certain abuse opportunities while narrowing others.

### Methodology and scope
- Classification exercise of 47 systems across seven automation levels.
- Comparative analysis across system age, geography, and securities types.
- Examination of information provision and asymmetries between market participants.
- Abuse-potential analysis focused on specific trading abuses (prearranged trading, noncompetitive execution, trading ahead of customers).

### Policy and regulatory implications (as analyzed in the paper)
- Regulatory implications are considered in light of how different levels of automation affect:
  - Information asymmetries between direct-access traders and outside investors.
  - Opportunities for trading abuses such as prearranged trading, noncompetitive execution, and trading ahead of customers.
- The analysis identifies that certain automation levels can both widen and narrow opportunities for trading abuses, implying nuanced regulatory responses dependent on the level of automation.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/automating-the-price-discovery-process-some-international-comparisons-and-regulatory-831_