Network Effects in Double Auction Markets with Automated Traders

Many electronic markets are linked together into larger “network markets” where the links reflect constraints on traders. These constraints mean that a choice to trade in one market limits the trader’s choice of other markets to use. This kind of network market is important because so many basic products, including gas, water, and electricity, are traded in such markets, and yet it has been little studied until now. This paper studies networks of double auction markets populated with automated traders, concentrating on the effects of different network topologies. We find that different topologies confer significant economic benefits to individual markets, suggesting that these network effects can be an important consideration in market design.