Flow Trading

70 Pages Posted: 24 Jun 2022 Last revised: 4 Apr 2023

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 "Mina" Lee

Board of Governors of the Federal Reserve System

David Malec

University of Cologne

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2023

Abstract

We propose 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. The proposal has several advantages over the status quo.

Keywords: market design, financial exchanges, portfolios, computation

Suggested Citation

Budish, Eric B. and Cramton, Peter and Kyle, Albert (Pete) S. and Lee, Jeongmin and Malec, David, Flow Trading (April 3, 2023). 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

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

David Malec

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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