Designing Call Auction Institutions: Is Double Dutch The Best?
This paper is an exercise in the institutional design of' call markets' (Schwartz, I988; Whitcomb, I985) using the experimental laboratory as a test bed. We evaluate the comparative performance1 of three new institutions for exchange when all trades are simultaneously executed at a uniform price. Call markets have been used on many European (and Israeli) Stock Exchanges, and for the daily opening on the New York, American and Tokyo Stock Exchanges in all outstanding listed issues. In some versions the bids (offers) are verbal, in others written. In some cases the procedure is Walrasian: orders may be modified after a trial price is given (Whitcomb, I985; also see Jarecki, I976 for the Walrasian mechanism implemented with a unanimity stopping rule in the London bullion market). In France, new issues are offered in fixed quantity using modified uniform price sealed bid auction rules (McDonald and Jaquillat, I974). The rules of trading on all these exchanges are subject to incremental adjustment in the light of experience. In recognition of this continuing adaptation the Chicago Mercantile Exchange publishes its Consolidated Rules as a loose-leaf three ring notebook! These considerations motivate our interest in examining three potential new exchange mechanisms., As their names suggest, these institutions are generalisations of auctions which already exist in the field.2 Double Dutch (DD), is a generalisation of the Dutch Auction; Double English (EE), a generalisation of the English Auction; and, Dutch English (DE), a special form of tatonnement using a single clock which is a Dutch clock to buyers and an English clock to sellers. Our generalisations make the supply quantity endogenous thus broadening the scope of English and Dutch auctions to markets in which both buyers and sellers are active in the exchange process. Two cited disadvantages of sealed bid-offer call markets (Schwartz, I988, pp. 442-6) are corrected by