Optimal Auction Duration: A Price Formation Viewpoint

42 Pages Posted: 28 Jun 2019

See all articles by Paul Jusselin

Paul Jusselin

Ecole Polytechnique, Palaiseau

Thibaut Mastrolia

Ecole Polytechnique, Palaiseau - CMAP CNRS-UMR 7641 and Ecole Polytechnique

Mathieu Rosenbaum

Ecole Polytechnique, Palaiseau

Date Written: June 4, 2019

Abstract

We consider an auction market in which market makers fill the order book during a given time period while some other investors send market orders. We define the clearing price of the auction as the price maximizing the exchanged volume at the clearing time according to the supply and demand of each market participants. Then we derive in a semi-explicit form the error made between this clearing price and the fundamental price as a function of the auction duration. We study the impact of the behavior of market takers on this error. To do so we consider the case of naive market takers and that of rational market takers playing a Nash equilibrium to minimize their transaction costs. We compute the optimal duration of the auctions for 77 stocks traded on Euronext and compare the quality of price formation process under this optimal value to the case of a continuous limit order book. Continuous limit order books are found to be usually sub-optimal. However, in term of our metric, they only moderately impair the quality of price formation process. Order of magnitude of optimal auction durations is from 2 to 10 minutes.

Keywords: Microstructure, Market Design, Auctions, Limit Order Book, Continuous Trading, Market Making, Nash Equilibrium, BSDES

Suggested Citation

Jusselin, Paul and Mastrolia, Thibaut and Rosenbaum, Mathieu, Optimal Auction Duration: A Price Formation Viewpoint (June 4, 2019). Available at SSRN: https://ssrn.com/abstract=3399151 or http://dx.doi.org/10.2139/ssrn.3399151

Paul Jusselin

Ecole Polytechnique, Palaiseau ( email )

Palaiseau
France

Thibaut Mastrolia

Ecole Polytechnique, Palaiseau - CMAP CNRS-UMR 7641 and Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91128
France

Mathieu Rosenbaum (Contact Author)

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

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