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Trading of Complex Commodities. Josh Johnson. Trading. Buyers Sellers. For Example. Car Buyers Car Dealers. Another Example. Car Buyers Car Dealers Manufacturers.

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Trading l.jpg
Trading

Buyers Sellers


For example l.jpg
For Example

Car Buyers Car Dealers


Another example l.jpg
Another Example

Car Buyers Car Dealers Manufacturers


Central marketplace l.jpg
Central Marketplace

Marketplace


Central marketplace6 l.jpg
Central Marketplace

Necessary?

Marketplace


Central marketplace7 l.jpg
Central Marketplace

Necessary?

Bulletin board


Central marketplace8 l.jpg
Central Marketplace

Necessary?

Bulletin board

Middleman


Central marketplace9 l.jpg
Central Marketplace

Necessary?

Bulletin board

Middleman

Auction


Central marketplace10 l.jpg
Central Marketplace

Necessary?

Bulletin board

Middleman

Auction

Exchange


Examples of exchanges l.jpg
Examples of Exchanges

  • Stock/Commodity exchanges

  • Specialized exchanges (e.g. specialist systems)


Example of an order l.jpg
Example of an Order

Buy a red Mustang


Example of an order13 l.jpg
Example of an Order

Buy a red Mustang,

less than 2 years old


Example of an order14 l.jpg
Example of an Order

Buy a red Mustang,

less than 2 years old,

willing to pay $25,000


Example of an order15 l.jpg
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


General case l.jpg
General Case

An order describes a set of items, such as the Mustangs and Corvettes.


General case17 l.jpg
General Case

An order describes a set of items, such as the Mustangs and Corvettes.

The buyer wants to get oneof these items.


Graphical view of an order l.jpg
Graphical View of an Order

Space of all items


Graphical view of an order19 l.jpg
Graphical View of an Order

Red Mustangs less

than 2 years old

Space of all items


Graphical view of an order20 l.jpg
Graphical View of an Order

All color Corvettes

made this year

Red Mustangs less

than 2 years old

Space of all items


Price l.jpg
Price

Price is a function of an item.

$30,000

Price

$25,000

Corvettes

Mustangs

Space of all items


Buy and sell orders l.jpg
Buy and Sell Orders

Price

Buy order


Buy and sell orders23 l.jpg
Buy and Sell Orders

Price

Price

Buy order

Sell order


Matching l.jpg
Matching

Two orders match if they intersect…


Matching25 l.jpg
Matching

Two orders match if they intersect…

Price

Buy order


Matching26 l.jpg
Matching

Two orders match if they intersect…

Sell order

Price

Buy order


For example27 l.jpg
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


For example28 l.jpg
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


For example29 l.jpg
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


For example30 l.jpg
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


Slide31 l.jpg
Fill

A result of trading, that is, an item that

matches both orders.


Slide32 l.jpg
Fill

A result of trading, that is, an item that

matches both orders.

Sell order

Price

Buy order


Formal definition l.jpg
Formal Definition

  • An order is

  • an item set I


Formal definition34 l.jpg
Formal Definition

  • An order is

  • an item set I,and

  • a function Price: I R+


Formal definition35 l.jpg
Formal Definition

  • An order is

  • an item set I,and

  • a function Price: I R+

  • A fill is

  • an item


Formal definition36 l.jpg
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


Matcher engine l.jpg
Matcher Engine

  • Limitations:

  • Specific items in sell orders

  • Restrictions on buy item sets

  • No price functions


Specific sell orders l.jpg
Specific Sell Orders

Good:

Sell a red Mustang made in 1999

Bad:

Sell any color Mustang made before 1999


Restrictions on buy item sets l.jpg
Restrictions on Buy Item Sets

Good:

Bad:

Year

Year

Color

Color


No price function l.jpg
No Price Function

Good:

Bad:

Price

Price



Matcher architecture42 l.jpg
Matcher Architecture

Orders

User

interface

Matcher

Fills

Orders

User

interface

Fills

Orders

User

interface

Fills


Matcher architecture43 l.jpg
Matcher Architecture

Orders

User

interface

Matcher

Fills

Index of

sell orders

Orders

User

interface

Fills

List of

buy orders

Orders

User

interface

Fills


Trading cycle l.jpg
Trading Cycle

Process all

incoming orders

Re-match all

pending orders

Stop

trading?

No

Yes


Matching process l.jpg
Matching Process

  • For each buy order, search the indexing

  • structure for matching sell orders

  • When finding matches, generate fills


Fairness l.jpg
Fairness

  • Prefer matches with better prices

  • Give priority to better-price orders

  • Give priority to earlier orders


Extensions l.jpg
Extensions

  • Order modification

  • Disjunctive orders

  • Confirmations


Running time l.jpg
Running Time

  • Almost linear in the number of orders

  • Almost linear in the length of order

  • description

  • Memory is the main bottleneck.


Performance l.jpg
Performance

  • 400 MHz PC with 384 Mbytes memory,

  • C++ implementation under Windows NT:

  • 100,000 pending orders

  • 500 new orders per second


Extended architecture l.jpg
Extended Architecture

User

Interface

Orders

Matcher

Broker

Orders

Fills

Fills

Orders

User

Interface

Fills

Broker

Orders

Orders

User

Interface

Fills

Fills


Extended architecture51 l.jpg
Extended Architecture

Distributed Matcher

User

Interface

Orders

Matcher

Broker

Orders

Fills

Fills

Orders

User

Interface

Fills

Broker

Orders

Orders

User

Interface

Fills

Fills


Broker functions l.jpg
Broker Functions

  • Pre-compile complex orders

  • Handle price functions

  • Handle complex item sets

  • Shield the user from processing delays

  • Support automated trading


Advantages l.jpg
Advantages

  • Fewer limitations on orders

  • Extra features

  • Distributed computation


Coming soon l.jpg
Coming Soon

  • Broker algorithms

  • Empirical performance study


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