Encyclopedia of Quantitative Finance, IV Volume Set

Calibration see Model Calibration

Call Auction Markets

Countless market structures exist for equity trading. Each is a variant of and/or a hybrid combination of four generics: (i) the continuous order-driven, agency market, (ii) the periodic order-driven call auction, (iii) the continuous quote-driven, dealer market, and (iv) the negotiated market (e.g., floor trading, upstairs block negotiation, and electronic negotiation). One of the common market mechanisms is the call auction market.

The distinguishing characteristic of a call auction is the batching of orders for simultaneous execution in a multilateral trade at a single clearing price, at a single point in time. This contrasts with continuous trading (either order or quote driven) where a trade can occur whenever a buy and a sell order match or cross in price.

At the specific point in time when a market is “called”, buy orders are sorted and the shares aggregated from the highest priced buy to the lowest, and sell orders are sorted and the shares aggregated from the lowest priced sell to the highest. The two arrays of aggregated shares are matched, and the clearing price is set at the value at which the largest number of shares will execute—where the aggregated number of shares to buy (which decreases with price) equals the aggregated number of shares to sell (which increases with price). Buy orders at the clearing price ...