Parimutuel principles are widely used as an alternative to fixed odds
gambling in which a bookmaker acts as a dealer by quoting fixed rates of
return on specified wagers. A parimutuel game is conducted as a call
auction in which odds are allowed to fluctuate during the betting period
until the betting period is closed or the auction 'called'. The prices
or odds of wagers are set based upon the relative amounts wagered on
each risky outcome. In financial microstructure terms, trading under
parimutuel principles is characterised by (1) call auction,
non-continuous trading; (2) riskless funding of claim payouts using the
amounts paid for all of the claims during the auction; (3) special
equilibrium pricing conditions requiring the relative prices of
contingent claims equal the relative aggregate amounts wagered on such
claims; (4) endogenous determination of unique state prices; and (5)
higher efficiency. Recently, a number of large investment banks have
adopted a parimutuel mechanism for offering contingent claims on various
economic indices, such as the US Nonfarm payroll report and Eurozone
Harmonised inflation. Our paper shows how the market microstructure
incorporating parimutuel principles for contingent claims which allows
for notional transactions, limit orders, and bundling of claims across
states is constructed. We prove the existence of a unique price
equilibrium for such a market and suggest an algorithm for computing the
equilibrium. We also suggest that for a broad class of contingent
claims, that the parimutuel microstructure recently deployed offers many
advantages over the dominant dealer and exchange continuous time mechanisms
