A real options model for establishing an electronic securities trading system under uncertain rate of Internet trading

Abstract

This paper presents a real options approach (ROA) for establishing a new decision model under an uncertain rate of Internet securities trading. The proposed approach can assist securities firms in evaluating the optimal threshold value for establishing an electronic securities trading system (ESTS). With the proposed approach, strategy managers can prevent the downside risk for such an ESTS project, and establish the optimal dynamic decision rule through manageable flexibility. This paper assumes that the rate of Internet securities trading follows geometric Brownian motion. The net profit will be increased after ESTS is established since different charges are levied for different ways of trading securities. Accordingly, a proposed model is introduced by the ROA. The closed form solution of the optimal entry threshold value for the ESTS investment project is determined, two theorems are proven and sensitivity analysis for related parameters is also conducted. The conclusions provide a valuable reference for strategic managers of securities firms when they make decisions for establishing ESTS.