A Theory of 'Auction as a Search' in Speculative Markets

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Abstract

'Auction as a Search' is an alternative tatonnement mechanism proposed for limit order markets. In high frequency order-driven markets, we model the tatonnement process as a search by buyers for sellers and vice-versa. We propose a total order book model, comprising limit orders and latent orders, in the absence of a market maker. A zero intelligence approach of agents is employed using a diffusion-drift-reaction model to explain the trading through continuous auctions (price and volume). The search (levy or Brownian) for transaction price is the primary diffusion mechanism with other behavioural dynamics in the model inspired by foraging, chemotaxis and robotic search. Analytic and asymptotic analysis is provided for several scenarios and examples. Numerical simulation of the model extends our understanding of the relative performance between brownian, superdiffusive and ballistic search in the model.

Keywords

Market Microstructure; Search; Limit Order Markets; Continuous Auctions; High Resolution; Zero Intelligence

Article

Pani, S., 2020. A theory of 'auction as a search' in speculative markets. International Journal of Financial Markets and Derivatives7(4), pp.337-374, doi: 10.1504/IJFMD.2020.111887

Preprint