Trading of Complex Commodities

1. Trading of Complex Commodities Josh Johnson

2. Trading Buyers Sellers

3. For Example Car Buyers Car Dealers

4. Another Example Car Buyers Car Dealers Manufacturers

5. Central Marketplace Marketplace

6. Central Marketplace Necessary? Marketplace

7. Central Marketplace Necessary? Bulletin board

8. Central Marketplace Necessary? Bulletin board Middleman

9. Central Marketplace Necessary? Bulletin board Middleman Auction

10. Central Marketplace Necessary? Bulletin board Middleman Auction Exchange

11. Examples of Exchanges • Stock/Commodity exchanges • Specialized exchanges (e.g. specialist systems)

12. Example of an Order Buy a red Mustang

13. Example of an Order Buy a red Mustang, less than 2 years old

14. Example of an Order Buy a red Mustang, less than 2 years old, willing to pay $25,000

15. Example of an Order Buy a red Mustang, less than 2 years old, willing to pay $25,000 OR Any color Corvette, brand-new, willing to pay $30,000

16. General Case An order describes a set of items, such as the Mustangs and Corvettes.

17. General Case An order describes a set of items, such as the Mustangs and Corvettes. The buyer wants to get oneof these items.

18. Graphical View of an Order Space of all items

19. Graphical View of an Order Red Mustangs less than 2 years old Space of all items

20. Graphical View of an Order All color Corvettes made this year Red Mustangs less than 2 years old Space of all items

21. Price Price is a function of an item. $30,000 Price $25,000 Corvettes Mustangs Space of all items

22. Buy and Sell Orders Price Buy order

23. Buy and Sell Orders Price Price Buy order Sell order

24. Matching Two orders match if they intersect…

25. Matching Two orders match if they intersect… Price Buy order

26. Matching Two orders match if they intersect… Sell order Price Buy order

27. For Example Buy: Red Mustang, Made after 1998, For $25,000 or less OR Any color Corvette, Made in 2001, For $30,000 or less

28. For Example Buy: Red Mustang, Made after 1998, For $25,000 or less OR Any color Corvette, Made in 2001, For $30,000 or less Sell: 2001 black Mustang, For $24,000 or more OR 1996 red Mustang, For $18,000 or more OR 2001 silver Corvette, For $28,000 or more

29. For Example Buy: Red Mustang, Made after 1998, For $25,000 or less OR Any color Corvette, Made in 2001, For $30,000 or less Sell: 2001 black Mustang, For $24,000 or more OR 1996 red Mustang, For $18,000 or more OR 2001 silver Corvette, For $28,000 or more Intersect

30. For Example Buy: Red Mustang, Made after 1998, For $25,000 or less OR Any color Corvette, Made in 2001, For $30,000 or less Sell: 2001 black Mustang, For $24,000 or more OR 1996 red Mustang, For $18,000 or more OR 2001 silver Corvette, For $28,000 or more Fill: 2001 silver Corvette, For $29,000

31. Fill A result of trading, that is, an item that matches both orders.

32. Fill A result of trading, that is, an item that matches both orders. Sell order Price Buy order

33. Formal Definition • An order is • an item set I

34. Formal Definition • An order is • an item set I,and • a function Price: I R+

35. Formal Definition • An order is • an item set I,and • a function Price: I R+ • A fill is • an item

36. Formal Definition • An order is • an item set I,and • a function Price: I R+ • A fill is • an item , and • a price p,such that

37. Matcher Engine • Limitations: • Specific items in sell orders • Restrictions on buy item sets • No price functions

38. Specific Sell Orders Good: Sell a red Mustang made in 1999 Bad: Sell any color Mustang made before 1999

39. Restrictions on Buy Item Sets Good: Bad: Year Year Color Color

40. No Price Function Good: Bad: Price Price

41. Matcher Architecture Matcher

42. Matcher Architecture Orders User interface Matcher Fills Orders User interface Fills Orders User interface Fills

43. Matcher Architecture Orders User interface Matcher Fills Index of sell orders Orders User interface Fills List of buy orders Orders User interface Fills

44. Trading Cycle Process all incoming orders Re-match all pending orders Stop trading? No Yes

45. Matching Process • For each buy order, search the indexing • structure for matching sell orders • When finding matches, generate fills

46. Fairness • Prefer matches with better prices • Give priority to better-price orders • Give priority to earlier orders

47. Extensions • Order modification • Disjunctive orders • Confirmations

48. Running Time • Almost linear in the number of orders • Almost linear in the length of order • description • Memory is the main bottleneck.

49. Performance • 400 MHz PC with 384 Mbytes memory, • C++ implementation under Windows NT: • 100,000 pending orders • 500 new orders per second

50. Extended Architecture User Interface Orders Matcher Broker Orders Fills Fills Orders User Interface Fills Broker Orders Orders User Interface Fills Fills