Wednesday, May 23, 2012

Practical Exchange Design by McAfee and Vassilvitskii

Google's Preston McAfee and Sergei Vassilvitskii offer a breezy Overview of Practical Exchange Design

Its conclusions:

"A rich set of tools and know-how for building and improving exchanges is being developed. In particular, to summarize the findings, we recommend:

Intentionally designing a language for expressing trades, that accommodates distinctions that matter substantially but not those of lesser importance,

Designing the trading algorithm so that a straightforward strategy performs well,

Permitting iterative adjustment of bid and asked prices simplifies participant strategies but should be binding on the participants,

Publishing suitably aggregated marketplace statistics makes markets more efficient in several different ways,

Setting prices in a relatively coarse fashion without significant efficiency loss,

Treating somewhat different products as identical to simplify participation,

Keeping the exchange neutral, and not heavily tilting it toward one type of participant,

Minimizing algorithmic complexity that makes sensible participation difficult,

Publishing appropriate marketplace statistics to mitigate unavoidable complexities,

Creating rudimentary tools to help participants increase market e fficiency,

Attaining modest levels of revenue can be raised with a straight percentage charge and switching to value-added pricing for greater levels of revenue.

Economic analysis is an imperfect guide to the design of markets. Consequently, new designs should be tested in a laboratory setting prior to use in the world. Moreover, an understanding of what participants actually value is critical to a successful design."

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