The optimal design of a market

We study the optimal design of the rules of trade in a two-period market gi ven that agents arrive at different times and may only trade with agents pr esent contemporaneously. First period agents face a fixed cost of trading a cross periods. Given the non-convexities associated with the fixed cost, co mpetitive trading rules can result in inefficiencies in such a market and a nonymity must be sacrificed to achieve efficiency. Efficient trading rules have a market maker (who is given a monopoly right to trade across periods) who Faces some competition within period trading, but not across periods. The efficient choice of who should be market maker can be made by auctionin g rights to this position. With uncertainty across periods, efficient mecha nisms may involve multiple market makers, and the optimal number of market makers depends on the cost of trading, level of risk aversion, and presence of asymmetric information. Classification Numbers: D40, D78, G10. (C) 1999 Academic Press.