Optimal Auction Duration: A Price Formation Viewpoint

Jusselin Paul, Mastrolia Thibaut and Rosenbaum Mathieu
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Jusselin Paul: X - École polytechnique - IP Paris - Institut Polytechnique de Paris, CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Mastrolia Thibaut: CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Rosenbaum Mathieu: CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: Optimal Auction Duration in Financial Markets In the considered auction market, market makers fill the order book during a given time period while some other investors send market orders. The clearing price is set to maximize the exchanged volume at the clearing time according to the supply and demand of each market participant. The error made between this clearing price and the efficient price is derived as a function of the auction duration. We study the impact of the behavior of market takers on this error to minimize their transaction costs. We compute the optimal duration of the auctions for 77 stocks traded on Euronext and compare the quality of the price formation process under this optimal value to the case of a continuous limit order book. Continuous limit order books are usually found to be suboptimal. Order of magnitude of optimal auction durations is from 2–10 minutes.

Date: 2021-11
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Published in Operations Research, 2021, 69 (6), pp.1734-1745. ⟨10.1287/opre.2021.2113⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04558210

DOI: 10.1287/opre.2021.2113

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