[carterschonwald]

While I was at jpmorgan I actually spent some time thinking about alternative auction structures (vs the order book model). The current trading model is ultimately a mechanization of the rules from trading happened in a literal trading floor room, and a lot of the structural issues stem from those rules treating time as infinite resolution and the speed of information propagation/light being instaneous.

There’s some interesting details about how large trades are done today that could perhaps be better reflected into some element of auction design.

[anonu]

Worth studying the multiple mechanisms that drive the Tokyo Stock Exchange. Itayose vs Zaraba - and the role of the saitori. Here's an interesting paper from 1991:

https://www.researchgate.net/publication/24139396_Specialist...

[wolverine876]

So if we started with a clean slate, no trading room floor history framing our perspectives, how could we do it?

[carterschonwald]

thats that billion/trillion dollar question :)

so I think theres a huge design space, and I think it partially turns into a "mechanism design" challenge to articulate a landscape of transaction / market auction mechanisms that

1) incentivize maximizing market liquidity

2) recognize the speed of light is finite, and have that inform the minimal time scale matching can happen on.

3) obviate/remove the need to obscure large trades as a large number of smaller trades (which is half the value of so called algorithmic trading strategies to institutional investors). This could be via having one design constraint on auctions be that the market impact of the sum of the small trades should be equivalent to the single large trade. (ignoring the issue of the exogenous information of there was a large trade ).

some interesting knock on consequences of these ideas are the following

1) the larger the time scale you're willing wait for the trade to be matched to "the other side", the cheaper it should be to trade! (creating liquidity is valuable!)

2) if you're willing to allow your trade to be "partially matched" instead of all or nothing, that too creates liquidity.

the point being, you start with "what are all the complications of how people do large/complicated trades today that should just be trivial with the right auction" is sortah my perspective. thats glossing over a lot of complexity and other concerns, but those are some high notes.

that said,this is just the tip of the iceberg, and these sort of market design questions are genuinely under studied in my mind, and i could easily spend hours talking about this in greater depth over coffee or such.

[sjbase]

Couldn't agree more on the mechanism design front. There are so many dimensions to the problem - especially for US equities - that the design becomes quite nuanced and tradeoffs have to be made somewhere or other. The duration aspect of waiting for trades to be matched (and for liquidity to accumulate) is an especially challenging one in fast financial markets.

I'm curious if you've come across OneChronos (upcoming US equities ATS - I'm a founder there along with @lpage; disclaimer). A lot of what you describe is baked in as a goal of our auction design. Most importantly, drawing out liquidity by incentivizing truthful bidding and allowing people to encode things like substitutability. We try to do that by giving people the tools to express their full intent to the venue[1]. Don't wanna get any more salesy than I already have here, but I always like to get points of view from other practitioners.

[1]: https://www.onechronos.com/docs/expressive/