Neoclassical Supply and Demand, Experiments, and the Classical Theory of Price Formation

Neoclassical price theory was founded on axioms of price-taking behavior and the law of one price in a market, axioms inconsistent with a theory of endogenous price discovery in markets. Classical economists including Adam Smith narrated a price discovery process based on buyer and seller reservation values and their motivation to buy low and sell high; the classical sketch of price formation offers a quite fruitful foundation for a modern theory of price discovery, supplied below. Market experiments, based on private distributed reservation values and using rules governing open-outcry double auctions, converged endogenously, in three to four periods of repeat interaction, to an efficient outcome. These observations contradicted the widely believed, thought, and taught necessity for perfect information, large numbers, and price-taking behavior. However, these results were consistent with the old, classical, conception of price formation emerging from the collective interaction of the traders. Aggregation and price discovery constitute essential functions of classical markets. We explore the divergence of neoclassical scholars from this classical tradition. Revealingly, in describing the microdynamics of market price formation, prominent neoclassical utilitarians such as Marshall, with his description of a “corn-market in a county town,” and Böhm-Bawerk with his farmers’ horse market, reverted to this classical reservation-value framework.

High Frequency Trading of Commodities

Electronic platforms and high frequency traders (HFTs) have changed the nature of trading. Like equity markets, commodity markets have experienced an influx of algorithmic traders and a decline in “pit” or open outcry trading. Regulatory efforts to understand the effects of HFTs and to offer prudent guidelines or new rules are in their infancy. An overall hesitancy exists because academic studies have produced diverse results on liquidity, volatility, and market quality. This survey focuses on high frequency trading research in commodity derivative markets, documenting basic results and extracting inferences when warranted. Evidence indicates that HFTs act as market makers and their speed advantage has lowered transaction costs, generally during normal markets. Although not entirely conclusive, evidence also suggests that HFTs may exacerbate volatility by withdrawing liquidity in times of market stress, such as during “flash” crashes.

Part III Transfers in Particular Contexts, 19 The Transfer of Equity and Debt Securities

This chapter examines securities trading. Although securities are classed as choses of action, they have long been subject to special statutory schemes. In particular, the transfer of shares has long been subject to a registration requirement that importantly supplements the general law of assignment. The requirement for registration arose as a matter of historical necessity. Meanwhile, the modern statutory scheme relating to securities transfers was necessitated by the explosion of financial trading activity following the deregulation of the UK markets, or Big Bang, in the late 1980s. Almost all modern securities transactions are effected by means of electronic exchanges, which have replaced the open-outcry floor-based systems that operated in the past. The chapter then looks at the characteristics of these exchanges, the regulatory framework in which they operate, and the clearing houses on which they depend.

The Future of Price: Communicative Infrastructures and the Financialization of Indian Tea

For more than 150 years, most tea grown on plantations in northeast India has been sold in open-outcry auctions in Kolkata. In this essay, I describe how, in 2009, the Tea Board of India, the government regulator of the tea trade, began to convert auctioning from a face-to-face outcry process to a face-to-computer digital one. The Tea Board hoped that with the implementation of digital technologies, trade would soon revolve around the buying and selling of futures contracts, not individual lots of tea. Despite these efforts, the tea industry has thus far resisted all attempts at financialization. That so prominent a commodity as tea has yet to be financialized provides a unique opportunity to examine the how of financialization—the governmental and technical steps that precede futures and other kinds of derivatives markets. Futures markets rely on a standardized notion of price and of the material things being priced. The story of Indian tea’s resistance to financialization shows how such standardization requires not just a disentangling of commodities at the level of productive infrastructure (that is, the separation of individual trader and thing being traded) but also a reworking of the communicative infrastructure of trading. In this essay, I analyze this reworking by examining the effort to reform how tea is priced at auction. Specifically, I describe a transition in tea valuation from socially embedded price stories to standardized price scenarios.

The Dynamics Of Stock Market Development In Kenya

This paper highlights the origin of the stock market in Kenya, and traces the reforms that have been undertaken to develop the stock market. It also highlights the growth of the Kenyan stock market, as well as the challenges currently facing the market. The country has one stock market, known as the Nairobi Securities Exchange (formerly the Nairobi Stock Exchange). It is one of Africas largest stock markets. Since the early 1980s, a number of stock market reforms have been implemented in Kenya. These include the formation of a regulatory body (Capital Markets Authority CMA) in 1989, the replacement of the "Call-Over" trading system by the floor-based "Open-Outcry System" in 1991, the reduction of listing costs, the relaxation of the exchange control for locally controlled companies, and the repeal of the Exchange Control Act. Following these reforms, Kenyas stock market has developed significantly in terms of market capitalisation, the total value of stocks traded, and the turnover ratio. Although the stock market in Kenya has developed over the years, like many other developing countries' markets, it still faces a number of wide-ranging challenges.

Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-Free Rate

Macro announcements change the equilibrium risk-free rate. We find that Treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow after the announcement to discover the full impact. This customer flow informativeness is strongest when analyst macro forecasts are most dispersed. The result holds for 30-year Treasury futures trading in both electronic and open-outcry markets. We further show that intermediaries benefit from privately recognizing informed customer flow, as their own-account trading profitability correlates with customer order access.