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Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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April 30, 2003

Call Auction Trading: New Answers to Old Questions

By Gregory Bresiger

Also in this article

  • Call Auction Trading: New Answers to Old Questions

Reviewed by Gregory Bresiger

Edited by Robert A. Schwartz, John Aidan Byrne and Antoinette Colaninno

(Kluwer Academic Publishers, Norwell, Massachusetts, 157 pages).

Should it be "Back to the Future" for the markets? Are call auction markets - once used widely in the United States and now no longer as popular - the way to solve some of the persistent market structure problems, which include fragmentation and inadequate liquidity?

These were some of the questions considered at a conference some three years ago. This book recounts some of the debates about market structure. So the book can be profitably read by almost anyone in the trading industry.

The academic who led much of the discussions, Robert Schwartz, says he became intrigued with the idea of the call auction some 30 years ago. "Back then," Schwartz writes, "just about nobody on this side of the Atlantic knew what the term meant. However, at the time, non-electronic call market trading was used in several European markets, including Paris, Brussels, Frankfurt and, further to the east, Tel Aviv."

(Schwartz collaborated on this book with the man who edits this publication, and Antoinette Colaninno of Baruch College.)

Call auctions bunch orders together. The example used in the book is a store with several different lines. Some customers frequently jump lines in the hope of obtaining faster services. Employing the call auction system would mean one big line in which everyone had the same chance to be waited on.

Under a call auction market, orders are completed at specific points in time and through multilateral trades. By contrast, the more commonly used continuous trading system has executions whenever a buy or sell order meet in price.

How would one integrate continuous and call auction trading? Gerald Putnam, of Archipelago, and Junius Peake, an academic at the University of Northern Colorado, had an exchange on the dynamics of two different systems that are linked. What happens, Putnam asked, if the call auction's single line breaks down? What happens when immediate executions don't work, another conference participant wondered? These kind of problems, Putnam added, regularly happened on Nasdaq and on SelectNet.

"I've seen the NYSE shut down for days. The world does not come to an end," Peake said. "Well," Putnam noted, "it does come to an end for continuous trading. All I am saying is that competing linkages and competing market places will allow for multiple linkages."

The idea of call auctions is so old, some might say it is actually new. The Big Board had used a call auction system until the late 1860s when it turned to a continuous system. So, then, why return to the past?

Schwartz says the call auction system would make sense today because it is computerized. "A traditional and a computerized call are two very different systems. Computer technology is essential for unleashing the power of a modern call. This call, in turn, makes excellent use of electronic technology," Schwartz said.

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