Paper 2022/451 Original: eprint.iacr.org/2022/451 ↗

Improved Stock Market Structure Using Cryptography

Abstract

The stock market has two primary functions, that of providing liquidity and price discovery. While historically, the market micro-structure was mostly ignored or assumed to function ideally for the purpose of asset pricing, O’Hara (Journal of Finance, 2003) established that both liquidity and price discovery affect asset pricing, and consequently asset returns. In this work, we extend the analysis of Easley and O’Hara (Journal of finance, 2004) to study common stock market mechanisms, including open-bid and sealed-bid auctions, as well as the fact that the auctioneer may not be trustworthy. Our analysis shows that open-bid auctions dis-incentivize stock research, leading to higher volatility. On the other hand, we also show that in sealed-bid auctions, the price and volume of an auction reveals only partial private research information, thus retaining incentive for traders to do research. We also show how secure computation can be used to build auctions with a distributed auctioneer, where the clearing and partial-fulfillment information of the auction does not reveal unfilled orders of others, thus maintaining private information