Trading of Complex Commodities

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Trading of Complex Commodities

• Josh Johnson

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Trading

• Buyers
  Sellers

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For Example

• Car Buyers
  Car Dealers

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Another Example

• Car Buyers Car Dealers
  Manufacturers

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Central Marketplace
Marketplace
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Central Marketplace
Necessary?
Marketplace
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Central Marketplace
Necessary?
Bulletin board
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Central Marketplace
Necessary?
Bulletin board Middleman
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Central Marketplace
Necessary?
Bulletin board Middleman Auction
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Central Marketplace
Necessary?
Bulletin board Middleman Auction Exchange
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Examples of Exchanges

• Stock/Commodity exchanges
• Specialized exchanges (e.g. specialist systems)

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Example of an Order
Buy a red Mustang
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Example of an Order
Buy a red Mustang, less than 2 years old
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Example of an Order
Buy a red Mustang, less than 2 years old,
willing to pay 25,000
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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
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General Case
An order describes a set of items, such as the
Mustangs and Corvettes.
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General Case
An order describes a set of items, such as the
Mustangs and Corvettes. The buyer wants to get
one of these items.
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Graphical View of an Order
Space of all items
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Graphical View of an Order
Red Mustangs less than 2 years old
Space of all items
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Graphical View of an Order
All color Corvettes made this year
Red Mustangs less than 2 years old
Space of all items
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Price
Price is a function of an item.
30,000
Price
25,000
Corvettes
Mustangs
Space of all items
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Buy and Sell Orders
Price
Buy order
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Buy and Sell Orders
Price
Price
Buy order
Sell order
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Matching
Two orders match if they intersect
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Matching
Two orders match if they intersect
Price
Buy order
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Matching
Two orders match if they intersect
Sell order
Price
Buy order
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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
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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
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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
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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
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Fill
A result of trading, that is, an item that
matches both orders.
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Fill
A result of trading, that is, an item that
matches both orders.
Sell order
Price
Buy order
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Formal Definition

• An order is
• an item set I

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Formal Definition

• An order is
• an item set I, and
• a function Price I R

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Formal Definition

• An order is
• an item set I, and
• a function Price I R
• A fill is
• an item

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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

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Matcher Engine

• Limitations
• Specific items in sell orders
• Restrictions on buy item sets
• No price functions

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Specific Sell Orders
Good Sell a red Mustang made in 1999 Bad Sell
any color Mustang made before 1999
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Restrictions on Buy Item Sets
Good
Bad
Year
Year
Color
Color
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No Price Function
Good
Bad
Price
Price
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Matcher Architecture
Matcher
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Matcher Architecture
Orders
User interface
Matcher
Fills
Orders
User interface
Fills
Orders
User interface
Fills
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Matcher Architecture
Orders
User interface
Matcher
Fills
Index of sell orders
Orders
User interface
Fills
List of buy orders
Orders
User interface
Fills
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Trading Cycle
Process all incoming orders
Re-match all pending orders
Stop trading?
No
Yes
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Matching Process

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

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Fairness

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

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Extensions

• Order modification
• Disjunctive orders
• Confirmations

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Running Time

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

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Performance

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

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Extended Architecture
User Interface
Orders
Matcher
Broker
Orders
Fills
Fills
Orders
User Interface
Fills
Broker
Orders
Orders
User Interface
Fills
Fills
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Extended Architecture
Distributed Matcher
User Interface
Orders
Matcher
Broker
Orders
Fills
Fills
Orders
User Interface
Fills
Broker
Orders
Orders
User Interface
Fills
Fills
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Broker Functions

• Pre-compile complex orders
• Handle price functions
• Handle complex item sets
• Shield the user from processing delays
• Support automated trading

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Advantages

• Fewer limitations on orders
• Extra features
• Distributed computation

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Coming Soon

• Broker algorithms
• Empirical performance study