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Equilibria and incentives for illiquid auction markets

Author

Listed:
  • Joffrey Derchu
  • Dimitrios Kavvathas
  • Thibaut Mastrolia
  • Mathieu Rosenbaum

Abstract

We study a toy two-player game for periodic double auction markets to generate liquidity. The game has imperfect information, which allows us to link market spreads with signal strength. We characterize Nash equilibria in cases with or without incentives from the exchange. This enables us to derive new insights about price formation and incentives design. We show in particular that without any incentives, the market is inefficient and does not lead to any trade between market participants. We however prove that quadratic fees indexed on each players half spread leads to a transaction and we propose a quantitative value for the optimal fees that the exchange has to propose in this model to generate liquidity.

Suggested Citation

  • Joffrey Derchu & Dimitrios Kavvathas & Thibaut Mastrolia & Mathieu Rosenbaum, 2023. "Equilibria and incentives for illiquid auction markets," Papers 2307.15805, arXiv.org.
    • Handle: RePEc:arx:papers:2307.15805
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    References listed on IDEAS

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    2. Madhavan, Ananth, 1992. "Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    3. Jusselin Paul & Mastrolia Thibaut & Rosenbaum Mathieu, 2021. "Optimal Auction Duration: A Price Formation Viewpoint," Post-Print hal-04558210, HAL.
    4. Weibing Huang & Mathieu Rosenbaum & Pamela Saliba, 2019. "From Glosten-Milgrom to the whole limit order book and applications to financial regulation," Papers 1902.10743, arXiv.org.
    5. Eric Budish & Peter Cramton & John Shim, 2015. "Editor's Choice The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1547-1621.
    6. Joffrey Derchu & Philippe Guillot & Thibaut Mastrolia & Mathieu Rosenbaum, 2020. "AHEAD : Ad-Hoc Electronic Auction Design," Papers 2010.02827, arXiv.org.
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