On Using Proportional Representation Methods as Alternatives to Pro-rata Based Order Matching Algorithms in Stock Exchanges

Abstract

The first observation of the paper is that methods for determining proportional representation in electoral systems may be suitable as alternatives to the pro-rata order matching algorithm used in stock exchanges. The main part of our work is to comprehensively consider various well known proportional representation methods and analyse in details their suitability for replacing the pro-rata algorithm. Our analysis consists of a theoretical study as well as simulation studies based on data sampled from a distribution which has been suggested in the literature as models of limit orders. Based on our analysis, we put forward the suggestion that the well known Hamilton’s method is a superior alternative to the pro-rata algorithm for order matching applications.