Equity auction dynamics: latent liquidity models with activity acceleration

Mohammed Salek, Damien Challet and Ioane Muni Toke

Quantitative Finance, 2024, vol. 24, issue 10, 1381-1398

Abstract: Equity auctions display several distinctive characteristics in contrast to continuous trading. As the auction time approaches, the rate of events accelerates causing a substantial liquidity buildup around the indicative price. This, in turn, results in a reduced price impact and decreased volatility of the indicative price. In this study, we adapt the latent/revealed order book framework to the specifics of equity auctions. We provide precise measurements of the model parameters, including order submissions, cancelations, and diffusion rates. Our setup allows us to describe the full dynamics of the average order book during closing auctions in Euronext Paris. These findings support the relevance of the latent liquidity framework in describing limit order book dynamics. Lastly, we analyze the factors contributing to a sub-diffusive indicative price and demonstrate the absence of indicative price predictability.

Date: 2024
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DOI: 10.1080/14697688.2024.2367680

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