Flow Trading

Eric Budish, Peter Cramton, Albert Kyle, Jeongmin Lee and David Malec

No 31098, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D44 D47 D53 D82 G1 G2 G23 L13 L5 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-des and nep-mst
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Working Paper: Flow Trading (2022)
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