This book explores screen-based trading with an open order book, where traders' decisions influence others in real time via that open order book. Modelling traders' actions using discrete choice, a method proven in other fields but new to finance, and the integration of discrete choice into a Markov Process, offers an innovative approach to understanding decision making under uncertainty. We call this combination "Doubly Stochastic Markov Process" (DSMP for short).

The book is aimed at those interested in real market performance with traders' modelling based on behavioural expertise.

Monitoring orders instead of prices creates a competitive advantage because the adjustment of prices requires prior adjustment of orders. Only the matching of orders generates transactions and prices. Efficient order management turns risky volatility into profits.

The presentation of DSMP is preceded by an introductory overview of trading venues and concludes with an outlook on the increasing suitability of stochastic processes to implement the interactions of agents and to facilitate modelling the self-organisation of markets.

Examines screen-based trading with an open order book in electronic stock markets Illustrates the true interactions and the matching of orders to generate prices Demonstrates how discrete choice better captures the complexities of real-world stock market trading

Autorentext

Otto Loistl held the Chair of Banking and Finance at the University of Paderborn (1975-1991) and later chaired the Institute for Investment Banking and Catallactics at Vienna University of Economics and Business (1991-2008). His research in real capital markets includes developing a market microstructure model, advising the Frankfurt Stock Exchange, and contributing to Xetra’s market surveillance. Georg Behm earned his doctorate at Vienna University of Economics and Business with a thesis on valuing innovative companies under Prof. Loistl. He is a court-certified expert in corporate valuation and advises on corporate finance and M&A, with extensive experience in valuation methodologies. Sascha Bakry graduated from Vienna University of Economics and Business, focusing on discounted cash flow valuation with constant risk premia and risky debt under Prof. Loistl’s supervision. He is currently a Partner at Deloitte Austria, specializing in Banking, Treasury, and Capital Markets.

Inhalt

Preface: Beyond Markowitz: Trading turns volatilities into profits.- Introduction.- Decision-making with Known Probabilities of Outcome.- Performance of Real Trading Venues.- Discrete Choice Capabilities to Select Orders.- Decision Frame Modelling.- Entropy and Economic Efficiency.- Outlook.