WHAT IS Walrasian Market
A Walrasian Market is an economic model of a market process in which orders are collected into batches of buys and sells and then analyzed to determine a clearing price that will decide the market price. This is also referred to as a call market.
BREAKING DOWN Walrasian Market
The Walrasian market model is used regularly in the financial markets. The New York Stock Exchange (NYSE) uses a similar process before the opening bell in order to determine opening prices. A specialist looks at all the collected orders for a particular security and selects the price that will clear the greatest number of trades. In fact, up until 1871 all trading on the New York Stock Exchange was executed in this fashion.
Within a Walrasian market, buy and sell orders are grouped together and then carried out at specific times instead of executed one by one continuously. For example, say these are the buy orders for Company A’s stock:
Buy 1,000 shares at $5.25
Buy 500 shares at $5.00
Buy 700 shares at $5.50
Buy 500 shares at $5.25
Sell 1,000 shares at $5.25
Sell 500 shares at $5.00
Sell 700 shares at $5.50
Sell 500 shares at $5.25
In a Walrasian market, the buy orders are grouped together and executed at a price and time that will clear most of those orders. In this case, that price might be $5.25. Even though some of the parties are willing to buy or sell for $5.00, the price that clears most of the transactions is $5.25, and in a Walrasian market, that is the price at which the exchange's market analyst executes these trades in.
Walrasian Market Compared to an Auction Market
A Walrasian market differs from an auction market, in which buyers and sellers trade continuously. In auction markets, market forces more directly determine the final price, whereas the buyers and sellers in a Walrasian market do not have the last say on what the final price is in their trades.
In an auction market, buyers enter competitive bids and sellers enter competitive offers simultaneously. The price at which a stock is traded is a representation of the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept. Matching bids and offers are then paired together and the orders are completed.
Walrasian markets can be more helpful in markets where there are few buyers, sellers, and shares to trade.