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Flow Trading

Author

Listed:
  • 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.

Suggested Citation

  • Eric Budish & Peter Cramton & Albert S. Kyle & Jeongmin Lee & David Malec, 2023. "Flow Trading," NBER Working Papers 31098, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31098
    Note: AP CF IO
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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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