[tloinuy]

Congrats on the launch! What are the main benefits of this approach compared to creating additional combo (multi-leg) products on existing exchanges?

There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc). Market-maker protections can allow outstanding orders to be cancelled if you get filled up to a predetermined risk setting. Most exchanges don't want to add additional complexity and more order types unless there's demand for it, which is presumably how market structure evolved to where it is today.

Combinatorial auctions are very interesting, but what's to stop exchanges from (1) creating more common bundles that people want to trade; (2) matching them with price-time priority so everyone gets a fair price? Wouldn’t the auction model just create wider or locked/crossed markets?

[lpage]

> Congrats on the launch! What are the main benefits of this approach compared to creating additional combo (multi-leg) products on existing exchanges?

Thanks! There are two main differences. For one, combos are (as the name suggests) predefined. That works reasonably well for products like futures and options where the 80/20 approach of making combos for somewhat structural ones like different expiries in the crude and eurodollar complex or packs and bundles designed as standalone financial instruments/hedges. An implied generational liquidity mechanism can knock out some basic structural price arbs between combos, resulting in a combinatorial auction approximation.

This approach falls apart when the combinations are very general as they are in the markets for equities, credit, and many of the assets that trade in the screens.

The CLOB/predefined bundle approach also doesn't address substitutability and non-price factors, and dealing with those is key to unlocking Pareto efficiencies.

> There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc)

The problem with block trading venues and other approaches, e.g., conditionals, boils down to incentives. Initiators of block trades are usually going in the same direction, so opportunities for direct interaction/coincidence of wants are rare. And market makers don't want to take large deltas unless they can hedge and/or know the counterparty. The net effect is not much size getting done. Conditionals are a similar story to blocks. They don't have the opportunity cost that a firm block resting on a venue does, but there's information leakage, and the surface area for interaction is still small. Market makers aren't incentivized to provide liquidity, and directional traders are worried about/behave strategically due to concerns over information leakage.

> what's to stop exchanges from (1) creating more common bundles that people want to trade

I'd say that the market has already done this in the form of ETFs and index products and an entire ecosystem of ETF market making emerged around it.

> (2) matching them with price-time priority so everyone gets a fair price? Wouldn't the auction model just create wider or locked/crossed markets?

I'm not sure that I follow this part entirely. The uniform price combinatorial auction that we're running results in everyone getting the same price on a symbol-by-symbol basis. And, we view time priority as a bad thing (the arms race dynamic of time priority was known to practitioners since markets first started going electronic but Budish et al. were the first to write about it in detail). Periodic auctions have better fairness and post-trade mark outs theoretically and in practice. Some of the European venues where batch auctions have made limited inroads demonstrated this.

[tloinuy]

Agree with the combinations being more ephemeral outside of futures and options markets. I do wonder how much liquidity will exist for these combos, since even some of the popular structural ones don't have a ton of volume.

Regarding the last point, let's say hypothetically you create a market for "+100 FB shares, -500 SNAP shares". If everyone is competing on price to quote that combination, that creates the most competitive market. However, if there are many expressive bids with various conditions (e.g. minimum quantities, conditional on execution of another leg, etc), they may not get "implied" into creating a reasonable market, creating exponentially more arbitrage opportunities if they become locked/crossed. This adds a lot more complexity in calculating implied markets and matching them in a sensible way. With price-time priority, I agree that there are downsides as you mentioned, but it makes it easier to ensure the tightest spreads.

[lpage]

> let's say hypothetically you create a market for "+100 FB shares, -500 SNAP shares". If everyone is competing on price to quote that combination, that creates the most competitive market

Some combinatorial auctions make this tradeoff, packaging goods either to deal with computational limitations or to concentrate bidding on a few packages. It can work if there's near total consensus on what the economically relevant packages are, but it doesn't work otherwise. US equities is an "otherwise" case given a huge diversity of needs. The chance of someone wanting the opposite side of even a pairs trade at any given point in time is vanishingly rare. It's far more likely that the person doing the pair would interact with two or more counterparties independently actively interested in or willing to for the right price sell FB and buy SNAP (perhaps conditional on hedging). The mechanism design game is more about giving every party the tools they need to communicate their value function to the auctioneer and creating the incentives to bid (close to) truthfully.

> However, if there are many expressive bids with various conditions (e.g. minimum quantities, conditional on execution of another leg, etc), they may not get "implied" into creating a reasonable market, creating exponentially more arbitrage opportunities if they become locked/crossed.

And this is why combinatorial auctions are a global optimization (as opposed to implied, which are effectively an iterative and greedy approximation) and, in our case, one that seeks to find uniform clearing prices. There are formats with price discrimination and others in which mechanical arbitrage within an auction is possible, but ours is not one of them. There isn't a separate price for {A}, {B}, and {A, B} — within each auction there's a uniform price for p_a and p_b, and p_{a,b} = p_a + p_b (and so on for any arbitrary linear combination). Theoretical point: linear prices don't always exist (in practice, they do for interdependent value goods that aren't strongly sub or superadditive, e.g., capital market goods), and they're not inherently desirable. We chose linear pricing largely because it's a natural fit for how capital markets work now, and perceived fairness/simplicity is itself a valid mechanism design consideration.