Pricing Engineering for Electronic Financial Markets

Abstract

Due to the demutualization of exchanges, the business case of operating an electronic financial market has become more important. Specifically, it is vital to design pricing incentives for the provision of order flow and thereby to assure market liquidity. The paper will introduce the Concept of pricing engineering for electronic financial markets. Based on an analysis of environmental factors and the objectives of the market operator, a focus will be laid on the implementation of fee structures that include liquidity incentives. The concepts were implemented in the context of a new electronic market, the Dubai International Financial Exchange (DIFX). The project will be described as a case study for the practical realization of the approach.