From Continuous Time Double Auctions to Walras Auctioneering: A Broad Dynamic Theory of Demand and Supply

The intersection of the supply and demand curves defines the price of a good in conventional Walrasian auctions. There is a linearly tiny reaction to small perturbations since both curves are generically regular. However, the idea is missing a vital component—transactions themselves. What follows when they take place? We create a dynamic theory of supply and demand based on agents with heterogeneous views to address the topic. The Walrasian mechanism is restored when the inter-auction time is limitless. We confirm empirically on the Bitcoin that when transactions are permitted to occur in continuous time, a unique behavior appears: supply and demand vanish quadratically near to the price. This explains why it is generally noticed that the price impact in financial markets behaves as the square root of the extra volume. The implications are significant because they suggest that prices are extremely sensitive to even slight changes in the market clearing process.