Marshall and Walras, disequilibrium trades and the dynamics of equilibration in the continuous double auction market

Prices and quantities converge to the theoretical competitive equilibria in continuous, double auction markets. The double auction is not a tatonnement mechanism. Disequilibrium trades take place. The absence of any influence of disequilibrium trades, which have the capacity to change the theoretical equilibrium, appears to be due to a property found in the Marshallian model of single market adjustments. The Marshallian model incorporates a principle of self-organizing, coordination that mysteriously determines the sequence in which specific pairs of agents trade in an environment in which market identities and agent preferences are not public. Disequilibrium trades along the Marshallian path of trades do not change the theoretical equilibrium. The substance of this paper is to demonstrate that the Marshallian principle captures a natural tendency of the adjustment in single, continuous, double auction markets and to suggest how it takes place. The Marshallian model of quantity adjustment and the Walrasian model of market price adjustment can be seen as companion theories that explain the allocation and price processes of a market. The Marshallian model explains the evolution of the allocation, who will meet and trade, and the Walrasian excess demand explains the evolution of prices when they do. © 2012 Elsevier B.V.