Foundations of Double Auctions from Theory and Practice

Simon Jantschgi, Heinrich H.Nax, Bary Pradelski and Marek Pycia

No 19690, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Double Auctions are among the most widespread market mechanisms that clear demand and supply in two-sided markets, notably on major stock exchanges. We provide a definition of Double Auctions that applies to both finite and infinite markets and is well-behaved in the limit. Our definition nests earlier formulations and allows us to formalize the Reference-Price Double Auction commonly used on stock exchanges. Our definition does not rely on any regularity assumptions and allows for ties and gaps in reported quotes, two phenomena that occur in practice. We axiomatize the class of Double Auctions in general as well as specific, prominent pricing rules. Finally, we provide a sufficient condition on traders’ beliefs under which Double Auctions are asymptotically incentive-compatible, implying, in particular, that they are always Strategy-Proof in the Large.

Date: 2024-11
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