Call Auctions with Contingent Orders

Abstract

We introduce a new mechanism for call auctions which are widely used in stock exchanges. Our unique design incorporates contingent claims (buy stock A, if selling stock B) into the price discovery process. With our proposed mechanism, we show that higher liquidity during the call auctions is achieved, as well as lower volatility after the call auctions. Moreover, we show that current call auctions and the proposed mechanism have similar incentive properties. Hence, we argue that the proposed mechanism would be an improvement over the existing opening auction rules at stock exchanges.