Research on trading strategy for generic continuous double auctions (CDAs) seems to take place on four parallel and minimally interacting threads. By “generic CDA”, I mean models of two-sided continuous trading of an abstract good, as distinct from strategies for predicting movements in financial markets.
1. Auction Theory. The static or one-shot double auction is well-characterized in auction-theoretic terms. Work on the dynamic case is much more rare and less successful. The pinnacle of this work as far as I can tell is a 1987 paper by Robert Wilson, which is heroic and insightful but does not reach definitive conclusions.
2. Artificial Trading Agents. Given the limited success of game-theoretic treatments, researchers have encoded strategies computationally in artificial trading agents, and evaluated them in simulation. Prominent efforts in this category includes work by Gjerstad, Cliff, Tesauro, and others. Julian Schvartzman and I have one of the latest contributions on this thread.
3. Agent-Based Finance. There is a substantial literature that also simulates heuristic agent strategies, but with the aim of analyzing global properties of market dynamics (e.g., reproducing qualitative phenomena from financial markets), rather than identifying superior strategies. Blake LeBaron is a major representative researcher in this area, and has written a fairly recent survey.
4. Market Microstructure. The finance literature addresses trading strategy, primarily from the perspective of market makers or liquidity providers. Their models differ from those above, in that the traders do not have fundamental private value for the abstract good.
Threads #2 and #3 share some common heritage in the Santa Fe Double Auction Tournament of 1990, and some strategies proposed in one thread are used in the other. In my recent work I am attempting to connect #1 and #2 by performing game-theoretic analysis of trading agents. Thread #4 seems the most isolated, though in principle its results should be quite relevant to the other threads, and vice versa.
So the question is: what are the most promising approaches for unifying these threads? Or is there some reason (beyond differences of their primary academic communities) they should develop independently?