Working Paper: NBER ID: w31098
Authors: Eric Budish; Peter Cramton; Albert S. Kyle; Jeongmin Lee; David Malec
Abstract: We introduce and analyze a new market design for trading financial assets. The design allows traders to directly trade any user-defined linear combination of assets. Orders for such portfolios are expressed as downward-sloping piecewise-linear demand curves with quantities as flows (shares/second). Batch auctions clear all asset markets jointly in discrete time. Market-clearing prices and quantities are shown to exist, despite the wide variety of preferences that can be expressed. Calculating prices and quantities is shown to be computationally feasible. Microfoundations are provided to show that traders can implement optimal strategies using portfolio orders. We discuss several potential advantages of the new market design, arising from the combination of discrete time and continuous prices and quantities (the most widely used alternative has these reversed) and the novel approach to trading portfolios of assets.
Keywords: No keywords provided
JEL Codes: D44; D47; D53; D82; G1; G2; G23; L13; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| new market design (D40) | reduction in latency arbitrage (F16) |
| new market design (D40) | improvement in liquidity (G33) |
| new market design (D40) | improved market transparency (G18) |
| new market design (flow trading) (D47) | efficiency of trading portfolios (G11) |
| new market design (flow trading) (D47) | direct trading of portfolios (G11) |
| direct trading of portfolios (G11) | enhanced arbitrage strategies (G19) |
| enhanced arbitrage strategies (G19) | reduced inefficiencies in pricing relationships (D61) |