Flow Trading

64 Pages Posted: 24 Jun 2022

See all articles by Eric B. Budish

Eric B. Budish

University of Chicago - Booth School of Business

Peter Cramton

University of Cologne

Albert S. Kyle

University of Maryland

Jeongmin Lee

Washington University in St. Louis - John M. Olin Business School

Date Written: June 23, 2022

Abstract

We propose a new market design for trading financial assets. The design has three elements: (1) traders may place orders for any user-defined linear combination of assets,with arbitrary positive and negativeweights; (2) orders are downwardsloping piecewise-linear demand curves with quantities expressed as flows; (3) markets clear jointly for all assets in discrete time using batch auctions. Market-clearing prices and quantities are shown to exist, with the latter unique, despite the wide variety of preferences that can be expressed. Calculating prices and quantities is shown to be computationally feasible using an interior point method to solve a quadratic program. Microfoundations for our approach to trading portfolios are provided using a CARA-normal framework. The proposal has several advantages over the status quo market design, arising from the novel approach to trading portfolios and the combination of discrete time and continuous prices and quantities (the status quo has these reversed).

Keywords: market design, financial exchanges, portfolios, computation

Suggested Citation

Budish, Eric B. and Cramton, Peter and Kyle, Albert (Pete) S. and Lee, Jeongmin, Flow Trading (June 23, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-82, Available at SSRN: https://ssrn.com/abstract=4145013 or http://dx.doi.org/10.2139/ssrn.4145013

Eric B. Budish (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8453 (Phone)

Peter Cramton

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Jeongmin Lee

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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