Order Driven-Call Auction Market Simulation
(excerpted from Chapter 3, How To Use Limit and Market Orders, in Robert A. Schwartz, Reto Francioni and Bruce W. Weber, The Equity Trader Course, John Wiley & Sons, 2006)

A pure order driven market is a trading environment where all of the participants are investors seeking to buy or to sell shares for their own portfolio purposes. Trades occur in the order driven market because the participants differ from each other in two fundamental ways. The first way is obvious - some investors are seeking to buy shares and others are looking to sell shares. The second way is more subtle - some investors choose to place limit orders and others decide to trade by market order. The environment is called "order driven" because the limit orders that are placed by some of the participants set the prices at which others can trade by market order.

Participants in a pure order driven market are referred to as "naturals" (the natural buyers and sellers). No intermed iary participates as a trader in a pure order driven market. Rather, the investors supply liquidity to themselves: the natural buyers are the source of liquidity for the natural sellers, and vice versa. The naturals fall into four groups: market and limit order buyers, and market and limit order sellers. For trading to be possible, the buyers need the sellers (and vice versa), and for trades to be realized the limit order placers need the market order placers (and vice versa). Because of this interdependency between the groups, we view the order driven market as an ecology, and consider how the market achieves an ecological balance.

Order driven markets can be structured in two fundamentally different ways. First, with a continuous market, a trade can be made at any moment in continuous time that a buy order and a sell order meet in price. In the continuous market, trading is generally a sequence of bi-lateral matches. In contrast, in a call auction, orders are batched together for a simultaneous execution, in a multilateral trade, at a specific point in time. At the time of a call, a market clearing price is determined and buy orders at this price and higher execute, as do sell orders at this price and lower.

The continuous and call auction environments can be combined. Call auctions are typically used at the beginning of each trading session to open the market. Calls can also be used to close and to restart the market (the major European equity markets do this) and periodically during a trading session (Deutsche Bšrse runs two intra-day calls).