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 e↵ect of competition between platforms that use these two di↵erent 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.