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

45 Pages Posted: 26 Oct 2020 Last revised: 16 Mar 2021

Date Written: May 15, 2020

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

Suggested Citation

Pani, Sudhanshu Sekhar, A Theory of 'Auction as a Search' in Speculative Markets (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3657488 or http://dx.doi.org/10.2139/ssrn.3657488

Sudhanshu Sekhar Pani (Contact Author)

School of Business Management, NMIMS ( email )

V. L. Mehta Road,
Vile Parle (W),
Mumbai, 400 056
India

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