Double Auctions and Transaction Costs

University of Zurich, Department of Economics, Working Paper No. 405

67 Pages Posted: 2 Apr 2022 Last revised: 31 May 2022

See all articles by Simon Jantschgi

Simon Jantschgi

University of Zurich

Heinrich H. Nax

ETH Zürich; University of Zurich

Bary Pradelski

CNRS, Université Grenoble Alpes

Marek Pycia

University of Zurich

Date Written: February 11, 2022

Abstract

Transaction costs are omnipresent in markets but are often omitted in economic models. We show that the presence of transaction costs can fundamentally alter incentive and welfare properties of Double Auctions, a canonical market organization. We further show that transaction costs can be categorized into two types. Double Auctions with homogeneous transaction costs---a category that includes fixed fees and price based fees---preserve the key advantages of Double Auctions without transaction costs: markets with homogeneous transaction costs are asymptotically strategyproof, and there is no efficiency-loss due to strategic behavior. In contrast, double auctions with heterogeneous transaction costs---such as spread fees---lead to complex strategic behavior (price guessing) and may result in severe market failures. Allowing for aggregate uncertainty, we extend these insights to market organizations other than Double Auctions.

Keywords: Double Auction, Transaction Costs, Incentives, Efficiency, Robustness.

JEL Classification: C72, D44, D47, D81, D82

Suggested Citation

Jantschgi, Simon and Nax, Heinrich H. and Pradelski, Bary and Pycia, Marek, Double Auctions and Transaction Costs (February 11, 2022). University of Zurich, Department of Economics, Working Paper No. 405, Available at SSRN: https://ssrn.com/abstract=4043576 or http://dx.doi.org/10.2139/ssrn.4043576

Simon Jantschgi (Contact Author)

University of Zurich ( email )

Institute for Banking & Finance
Zurich, 8001
Switzerland

Heinrich H. Nax

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Bary Pradelski

CNRS, Université Grenoble Alpes ( email )

Grenoble
France

HOME PAGE: http://cnrs.fr

Marek Pycia

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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