Research Seminar Program - Mina Lee (Washington University)

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FBE-221 (Theatre 4)

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Finance Seminar Co-Ordinator

Title: Flow Trading

Abstract: We propose a new market design for trading financial assets. The design has three elements: (1) traders may place orders for any user-defined linear combination of assets, with arbitrary positive and negative weights; (2) orders are downwardsloping piecewise-linear demand curves with quantities expressed as flows; (3) markets clear jointly for all assets in discrete time using batch auctions. Market-clearing prices and quantities are shown to exist, with the latter unique, despite the wide variety of preferences that can be expressed. Calculating prices and quantities is shown to be computationally feasible using an interior point method to solve a quadratic program. Microfoundations for our approach to trading portfolios are provided using a CARA-normal framework. The proposal has several advantages over the status quo market design, arising from the novel approach to trading portfolios and the combination of discrete time and continuous prices and quantities (the status quo has these reversed).