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Flow Trading

Author

Listed:
  • Eric Budish

    (University of Chicago, Booth School of Business)

  • Peter Cramton

    (University of Cologne and University of Maryland)

  • Albert S. Kyle

    (University of Maryland)

  • Jeongmin Lee

    (Olin Business School, Washington University in St.Louis)

  • David Malec

    (University of Cologne and University of Maryland)

Abstract

We propose a new market design for trading financial assets. The design combines three elements: (1) Orders are downward-sloping linear demand curves with quantities expressed as flows; (2)Markets clear in discrete time using uniform-price batch auctions; (3) Traders may submit orders for portfolios of assets, expressed as arbitrary linear combinations with positive and negative weights. Thus, relative to the status quo design: time is discrete instead of continuous, prices and quantities are continuous instead of discrete, and traders can directly trade arbitrary portfolios. Clearing prices and quantities are shown to exist, with the latter unique, despite the wide variety of preferences that can be expressed via portfolio orders; calculating prices and quantities is shown to be computationally feasible; microfoundations for portfolio orders are provided. The proposal addresses six concerns with the current market design: (1) sniping and the speed race; (2) the complexities and inefficiencies caused by tick-size constraints; (3) the cost and complexity of trading large quantities over time, (4) of trading portfolios, and (5) of providing liquidity in correlated assets; (6) fairness and transparency of optimal execution.

Suggested Citation

  • Eric Budish & Peter Cramton & Albert S. Kyle & Jeongmin Lee & David Malec, 2022. "Flow Trading," ECONtribute Discussion Papers Series 146, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:146
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_146_2022.pdf
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    Other versions of this item:

    • Eric Budish & Peter Cramton & Albert S. Kyle & Jeongmin Lee & David Malec, 2023. "Flow Trading," NBER Working Papers 31098, National Bureau of Economic Research, Inc.

    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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