Definition ∞ A trading mechanism defines the rules and procedures by which financial assets are bought and sold in a market. This includes how orders are placed, matched, and executed, as well as the pricing rules and settlement processes. Examples range from open outcry auctions to electronic order books and automated market makers. The choice of mechanism significantly influences market liquidity, price discovery, and fairness. It forms the operational structure of an exchange.
Context ∞ In digital asset markets, the diversity of trading mechanisms is a key area of discussion, frequently appearing in news comparing centralized exchanges with decentralized finance (DeFi) protocols. Automated market makers (AMMs) and peer-to-peer trading systems offer alternatives to traditional order books, each with distinct advantages and disadvantages regarding liquidity, slippage, and decentralization. Regulatory bodies are increasingly scrutinizing these mechanisms to ensure market integrity and investor protection.
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