An Agent-Based Model of Competition Between Financial Exchanges: Can Frequent Call Mechanisms Drive Trade Away from CDAs?

In the debate over high frequency trading, the frequent call (Call) mechanism has recently received considerable attention as a proposal for replacing the continuous double auction (CDA) mechanisms that currently run most financial markets. One natural question, which has begun to spur the development of new models, is the effect of competition between platforms that use these two different mechanisms when agents can strategize over platform choice. In this paper we contribute to this nascent literature by developing an agent-based model of competition between a Call market and a CDA market. Our model incorporates patient informed traders (both high-frequency and not) who are willing to wait for order execution at their preferred price and impatient background traders who demand immediate execution. We show that there is a strong tendency for the Call market to absorb a significant fraction of trade under most equilibrium and approximate-equilibrium conditions. These equilibria typically lead to significantly higher welfare for the background traders, an important measure of social value, than the operation of an isolated CDA market.