SIMON

Online platforms like Robinhood promote ‘zero-commission’ trading, but in reality, they hide their transaction costs. What are the implications for market design?

solo-authored

Show a short answer

Show abstract

There is a hidden cost of zero commission, but a priori, it's unclear who pays it. Unsophisticated traders bear the cost through greater market volatility and wider spreads, while sophisticated traders can shift the burden onto the platform by exploiting the volatility, ultimately reducing its revenue.

Transaction costs are ubiquitous in two-sided markets. However, to attract market participants, some market platforms promote `zero commission' models that, in reality, conceal these costs. In this paper, I examine how transaction cost transparency affects incentives and market performance. I show that hidden transaction costs induce additional volatility in the form of price cycles in markets that would be stable if transparent transaction costs were charged. To compete with the profit opportunities from price cycles, platforms with transparent costs must reduce them below the optimal monopolist level to attract traders. In this duopoly, I show that there is a market equilibrium: more risk-averse market participants prefer transparent transaction costs, while less risk-averse market participants choose hidden costs. Depending on the distribution of risk attitudes, transparent transaction costs can be more or less efficient than hidden transaction costs. Finally, I show that hidden transaction costs can potentially lead to market failure, as forward-looking and patient market participants may exploit price cycles by strategically placing more aggressive orders.

Double Auctions and Transaction Costs

Working Paper: Extended Abstract @23rd ACM Conference on Economics and Computation (EC'22), 2022

Transaction costs are ubiquitous in markets. How do they affect incentives and market performance, and how should they be designed with strategic traders?

with

Show a short answer

Show abstract

Discriminatory transaction costs may be preferable in small markets to avoid deadweight loss. However, in large markets, they can lead to complex price-guessing and potential market failure based on traders' beliefs, making uniform transaction costs preferable as they encourage price-taking behavior.

Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs---such as fixed and price fees---incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs---such as spread fees---can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders' beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.

Foundations of Double Auctions from Theory and Practice

Working Paper

Double auctions are ubiquitous in financial markets, but there is a disconnect between their theoretical models and practical implementations. How can we bridge this gap, and what new insights can we gain from doing so?

with

Show a short answer

Show abstract

We develop a unified framework for Double Auctions that applies to both finite and infinite markets, includes two-sided auctions on stock exchanges, and accommodates practical features like ties and gaps in reported values. Additionally, we uncover new insights into the stability and asymptotic incentive compatibility of Double Auctions.

Double auctions are among the most widespread market mechanisms that clear demand and supply in two-sided markets, notably on major stock exchanges. In this paper, we provide the first unified definition of double auctions that applies to both finite and infinite markets and is well-behaved in the limit. Our Double Auction not only nests earlier formulations but also allows us to formalize the Reference-Price Double Auction commonly used on stock exchanges. In contrast to prior work, our definition does not rely on any regularity assumptions, and allows ties and gaps in reported values, two phenomena occurring in practice. We axiomatize Double Auctions in general as well as the prominent pricing rules. Finally, we provide necessary and sufficient conditions on traders' beliefs under which our Double Auction is asymptotically incentive-compatible, implying, in particular, that it is always Strategy-Proof in the Large.

Competitive Market Behavior: Convergence and Asymmetry in the Experimental Double Auction

International Economic Review 64 (3), 2023, p.1087-1126

Barbara Ikica
Heinrich Nax
Diego Nunez Duran
Bary Pradelski

Continuous double auctions are at the heart of modern financial exchanges. What insights do controlled continuous double auction experiments provide about convergence to competitive equilibrium and individual trading behavior?

with

Show a short answer

Show abstract

Our experiments show that markets typically converge to competitive equilibrium after a few trading periods, but initially, there is an asymmetry favoring buyers, with deal prices usually below equilibrium due to buyers being more aggressively initially and less yielding over time.

We conducted a large number of controlled continuous double auction experiments to reproduce and stress-test the phenomenon of convergence to competitive equilibrium under private information. A common finding across a total of 104 markets (involving over 1,700 subjects and over 100 markets) is convergence after a handful of trading periods. Initially, however, there is evidence for an inherent asymmetry that favors buyers, which is expressed in symmetric markets by deal prices that are significantly below equilibrium prices. Analysis of over 80,000 observations of individual bids and asks helps identify several empirical ingredients contributing to the observed phenomena including higher initial aggressiveness amongst buyers than sellers.

Minimax and Sports: (i) Tennis, and (ii) Football/Soccer Penalties

Draft available upon request

A long-standing folk result claims that professional sports stars play Minimax a la von Neumann. Is this really true?

with

Show a short answer

Not necessarily! With openly available state-of-the-art data, we uncover new and significant evidence against minimax in both professional tennis and football.

abstract

Resistors in Dual Networks

(based on my Bachelor’s Thesis) E. J. Graph Theory Applications 8(2), 257-265 (2020)

Martina Furrer
Norbert Hungerbühler

A fun paper uncovering a novel connection between dual graphs.

with

Show abstract

answer

Let G be a finite plane multigraph and G' its dual. Each edge e of G is interpreted as a resistor of resistance R(e), and the dual edge e' is assigned the dual resistance R(e') :=1 / R(e). Then the equivalent resistance r(e) over e and the equivalent resistance r(e)' over e' satisfy r(e)/R(e) + r(e')/R(e')=1. We provide a graph theoretic proof of this relation by expressing the resistances in terms of sums of weights of spanning trees in G and G' respectively.

Optimal Clearing Schedules in Dynamic Markets

(based on my Master’s Thesis)

Currently inactive, but I’d love to get back to it. Couple of new ideas for designing financial exchanges. Happy to discuss it anytime.

solo-authored

answer

abstract

My Research

Here is what I am currently working on…

The Competitive Core of Combinatorial Exchange

Working Paper (Link to appear soon)

Many markets involve the exchange of bundles of indivisible goods without money, e.g., organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation. Is there an efficient and fair mechanism for such combinatorial exchange problems?

with

Thanh Nguyen
Alex Teytelboym

Show a short answer

Show abstract

Yes! We propose a novel mechanism, Competitive Core Selection, that builds upon a competitive equilibrium foundation with ties to pseudo-markets.

We consider combinatorial exchanges where agents have (possibly random) endowments and ordinal preferences over bundles of indivisible goods. We focus on the ordinal core—the set of all individually rational lottery assignments which cannot be blocked by a coalition whose members trade probability shares and receive first-order stochastically dominating lotteries. We show that the ordinal core is always non-empty and that any ordinal core allocation can be implemented as a lottery over near-feasible and ex-post efficient outcomes. In fact, we prove that there is always a set of allocations in the core, which we call the competitive core, that can be supported by prices arising from a novel competitive equilibrium foundation. When endowments are deterministic, competitive core allocations can be implemented over near-feasible ex-post core outcomes. Moreover, competitive core allocations are ordinally envy-free and ex-post envy-free up to one good (where envy is only justified if another agent’s endowment is either smaller or worth less in equilibrium). A mechanism that selects a competitive core allocation is strategyproof in the large. Our framework can be used in many real-world market design applications, such as organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation.

The Hidden Cost of Zero-Commission

Working Paper: Extended Abstract @25th ACM Conference on Economics and Computation (EC'24), 2024

Online platforms like Robinhood promote ‘zero-commission’ trading, but in reality, they hide their transaction costs. What are the implications for market design?

solo-authored

Show a short answer

Show abstract

There is a hidden cost of zero commission, but a priori, it's unclear who pays it. Unsophisticated traders bear the cost through greater market volatility and wider spreads, while sophisticated traders can shift the burden onto the platform by exploiting the volatility, ultimately reducing its revenue.

Transaction costs are ubiquitous in two-sided markets. However, to attract market participants, some market platforms promote `zero commission' models that, in reality, conceal these costs. In this paper, I examine how transaction cost transparency affects incentives and market performance. I show that hidden transaction costs induce additional volatility in the form of price cycles in markets that would be stable if transparent transaction costs were charged. To compete with the profit opportunities from price cycles, platforms with transparent costs must reduce them below the optimal monopolist level to attract traders. In this duopoly, I show that there is a market equilibrium: more risk-averse market participants prefer transparent transaction costs, while less risk-averse market participants choose hidden costs. Depending on the distribution of risk attitudes, transparent transaction costs can be more or less efficient than hidden transaction costs. Finally, I show that hidden transaction costs can potentially lead to market failure, as forward-looking and patient market participants may exploit price cycles by strategically placing more aggressive orders.

Double Auctions and Transaction Costs

Working Paper: Extended Abstract @23rd ACM Conference on Economics and Computation (EC'22), 2022

Transaction costs are ubiquitous in markets. How do they affect incentives and market performance, and how should they be designed with strategic traders?

with

Show a short answer

Show abstract

Discriminatory transaction costs may be preferable in small markets to avoid deadweight loss. However, in large markets, they can lead to complex price-guessing and potential market failure based on traders' beliefs, making uniform transaction costs preferable as they encourage price-taking behavior.

Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs---such as fixed and price fees---incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs---such as spread fees---can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders' beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.

Foundations of Double Auctions from Theory and Practice

Working Paper

Double auctions are ubiquitous in financial markets, but there is a disconnect between their theoretical models and practical implementations. How can we bridge this gap, and what new insights can we gain from doing so?

with

Show a short answer

Show abstract

We develop a unified framework for Double Auctions that applies to both finite and infinite markets, includes two-sided auctions on stock exchanges, and accommodates practical features like ties and gaps in reported values. Additionally, we uncover new insights into the stability and asymptotic incentive compatibility of Double Auctions.

Double auctions are among the most widespread market mechanisms that clear demand and supply in two-sided markets, notably on major stock exchanges. In this paper, we provide the first unified definition of double auctions that applies to both finite and infinite markets and is well-behaved in the limit. Our Double Auction not only nests earlier formulations but also allows us to formalize the Reference-Price Double Auction commonly used on stock exchanges. In contrast to prior work, our definition does not rely on any regularity assumptions, and allows ties and gaps in reported values, two phenomena occurring in practice. We axiomatize Double Auctions in general as well as the prominent pricing rules. Finally, we provide necessary and sufficient conditions on traders' beliefs under which our Double Auction is asymptotically incentive-compatible, implying, in particular, that it is always Strategy-Proof in the Large.

Competitive Market Behavior: Convergence and Asymmetry in the Experimental Double Auction

International Economic Review 64 (3), 2023, p.1087-1126

Barbara Ikica
Heinrich Nax
Diego Nunez Duran
Bary Pradelski

Continuous double auctions are at the heart of modern financial exchanges. What insights do controlled continuous double auction experiments provide about convergence to competitive equilibrium and individual trading behavior?

with

Show a short answer

Show abstract

Our experiments show that markets typically converge to competitive equilibrium after a few trading periods, but initially, there is an asymmetry favoring buyers, with deal prices usually below equilibrium due to buyers being more aggressively initially and less yielding over time.

We conducted a large number of controlled continuous double auction experiments to reproduce and stress-test the phenomenon of convergence to competitive equilibrium under private information. A common finding across a total of 104 markets (involving over 1,700 subjects and over 100 markets) is convergence after a handful of trading periods. Initially, however, there is evidence for an inherent asymmetry that favors buyers, which is expressed in symmetric markets by deal prices that are significantly below equilibrium prices. Analysis of over 80,000 observations of individual bids and asks helps identify several empirical ingredients contributing to the observed phenomena including higher initial aggressiveness amongst buyers than sellers.

Minimax and Sports: (i) Tennis, and (ii) Football/Soccer Penalties

Draft available upon request

A long-standing folk result claims that professional sports stars play Minimax a la von Neumann. Is this really true?

with

Show a short answer

Not necessarily! With openly available state-of-the-art data, we uncover new and significant evidence against minimax in both professional tennis and football.

abstract

Resistors in Dual Networks

(based on my Bachelor’s Thesis) E. J. Graph Theory Applications 8(2), 257-265 (2020)

Martina Furrer
Norbert Hungerbühler

A fun paper uncovering a novel connection between dual graphs.

with

Show abstract

answer

Let G be a finite plane multigraph and G' its dual. Each edge e of G is interpreted as a resistor of resistance R(e), and the dual edge e' is assigned the dual resistance R(e') :=1 / R(e). Then the equivalent resistance r(e) over e and the equivalent resistance r(e)' over e' satisfy r(e)/R(e) + r(e')/R(e')=1. We provide a graph theoretic proof of this relation by expressing the resistances in terms of sums of weights of spanning trees in G and G' respectively.

Optimal Clearing Schedules in Dynamic Markets

(based on my Master’s Thesis)

Currently inactive, but I’d love to get back to it. Couple of new ideas for designing financial exchanges. Happy to discuss it anytime.

solo-authored

answer

abstract

My Research

Here is what I am currently working on…

The Competitive Core of Combinatorial Exchange

With: Thanh Nguyen | Alex Teytelboym

Working Paper (Link to appear soon)

Many markets involve the exchange of bundles of indivisible goods without money, e.g., organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation. Is there an efficient and fair mechanism for such combinatorial exchange problems?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

We consider combinatorial exchanges where agents have (possibly random) endowments and ordinal preferences over bundles of indivisible goods. We focus on the ordinal core—the set of all individually rational lottery assignments which cannot be blocked by a coalition whose members trade probability shares and receive first-order stochastically dominating lotteries. We show that the ordinal core is always non-empty and that any ordinal core allocation can be implemented as a lottery over near-feasible and ex-post efficient outcomes. In fact, we prove that there is always a set of allocations in the core, which we call the competitive core, that can be supported by prices arising from a novel competitive equilibrium foundation. When endowments are deterministic, competitive core allocations can be implemented over near-feasible ex-post core outcomes. Moreover, competitive core allocations are ordinally envy-free and ex-post envy-free up to one good (where envy is only justified if another agent’s endowment is either smaller or worth less in equilibrium). A mechanism that selects a competitive core allocation is strategyproof in the large. Our framework can be used in many real-world market design applications, such as organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation.

The Hidden Cost of Zero-Commission

solo-authored

Working Paper: Extended Abstract @25th ACM Conference on Economics and Computation (EC'24), 2024

Online platforms like Robinhood promote ‘zero-commission’ trading, but in reality, they hide their transaction costs. What are the implications for market design?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Transaction costs are ubiquitous in two-sided markets. However, to attract market participants, some market platforms promote `zero commission' models that, in reality, conceal these costs. In this paper, I examine how transaction cost transparency affects incentives and market performance. I show that hidden transaction costs induce additional volatility in the form of price cycles in markets that would be stable if transparent transaction costs were charged. To compete with the profit opportunities from price cycles, platforms with transparent costs must reduce them below the optimal monopolist level to attract traders. In this duopoly, I show that there is a market equilibrium: more risk-averse market participants prefer transparent transaction costs, while less risk-averse market participants choose hidden costs. Depending on the distribution of risk attitudes, transparent transaction costs can be more or less efficient than hidden transaction costs. Finally, I show that hidden transaction costs can potentially lead to market failure, as forward-looking and patient market participants may exploit price cycles by strategically placing more aggressive orders.

Double Auctions and Transaction Costs

Working Paper: Extended Abstract @23rd ACM Conference on Economics and Computation (EC'22), 2022

Transaction costs are ubiquitous in markets. How do they affect incentives and market performance, and how should they be designed with strategic traders?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs---such as fixed and price fees---incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs---such as spread fees---can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders' beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.

Foundations of Double Auctions from Theory and Practice

Working Paper

Double auctions are ubiquitous in financial markets, but there is a disconnect between their theoretical models and practical implementations. How can we bridge this gap, and what new insights can we gain from doing so?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Double auctions are among the most widespread market mechanisms that clear demand and supply in two-sided markets, notably on major stock exchanges. In this paper, we provide the first unified definition of double auctions that applies to both finite and infinite markets and is well-behaved in the limit. Our Double Auction not only nests earlier formulations but also allows us to formalize the Reference-Price Double Auction commonly used on stock exchanges. In contrast to prior work, our definition does not rely on any regularity assumptions, and allows ties and gaps in reported values, two phenomena occurring in practice. We axiomatize Double Auctions in general as well as the prominent pricing rules. Finally, we provide necessary and sufficient conditions on traders' beliefs under which our Double Auction is asymptotically incentive-compatible, implying, in particular, that it is always Strategy-Proof in the Large.

Competitive Market Behavior: Convergence and Asymmetry in the Experimental Double Auction

Barbara Ikica | Heinrich Nax | Diego Nunez Duran | Bary Pradelski

International Economic Review 64 (3), 2023, p.1087-1126

Continuous double auctions are at the heart of modern financial exchanges. What insights do controlled continuous double auction experiments provide about convergence to competitive equilibrium and individual trading behavior?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

We conducted a large number of controlled continuous double auction experiments to reproduce and stress-test the phenomenon of convergence to competitive equilibrium under private information. A common finding across a total of 104 markets (involving over 1,700 subjects and over 100 markets) is convergence after a handful of trading periods. Initially, however, there is evidence for an inherent asymmetry that favors buyers, which is expressed in symmetric markets by deal prices that are significantly below equilibrium prices. Analysis of over 80,000 observations of individual bids and asks helps identify several empirical ingredients contributing to the observed phenomena including higher initial aggressiveness amongst buyers than sellers.

Minimax and Sports: (i) Tennis, and (ii) Football/Soccer Penalties

Draft available upon request

A long-standing folk result claims that professional sports stars play Minimax a la von Neumann. Is this really true?

Show a short answer

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

abstract

Resistors in Dual Networks

Martina Furrer | Norbert Hungerbühler

(based on my Bachelor’s Thesis) E. J. Graph Theory Applications 8(2), 257-265 (2020)

A fun paper uncovering a novel connection between dual graphs.

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Let G be a finite plane multigraph and G' its dual. Each edge e of G is interpreted as a resistor of resistance R(e), and the dual edge e' is assigned the dual resistance R(e') :=1 / R(e). Then the equivalent resistance r(e) over e and the equivalent resistance r(e)' over e' satisfy r(e)/R(e) + r(e')/R(e')=1. We provide a graph theoretic proof of this relation by expressing the resistances in terms of sums of weights of spanning trees in G and G' respectively.

Optimal Clearing Schedules in Dynamic Markets

solo-authored

(based on my Master’s Thesis)

Currently inactive, but I’d love to get back to it. Couple of new ideas for designing financial exchanges. Happy to discuss it anytime.

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

abstract

My Research

Here is what I am currently working on…

The Competitive Core of Combinatorial Exchange

With: Thanh Nguyen | Alex Teytelboym

Working Paper (Link to appear soon)

Many markets involve the exchange of bundles of indivisible goods without money, e.g., organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation. Is there an efficient and fair mechanism for such combinatorial exchange problems?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

We consider combinatorial exchanges where agents have (possibly random) endowments and ordinal preferences over bundles of indivisible goods. We focus on the ordinal core—the set of all individually rational lottery assignments which cannot be blocked by a coalition whose members trade probability shares and receive first-order stochastically dominating lotteries. We show that the ordinal core is always non-empty and that any ordinal core allocation can be implemented as a lottery over near-feasible and ex-post efficient outcomes. In fact, we prove that there is always a set of allocations in the core, which we call the competitive core, that can be supported by prices arising from a novel competitive equilibrium foundation. When endowments are deterministic, competitive core allocations can be implemented over near-feasible ex-post core outcomes. Moreover, competitive core allocations are ordinally envy-free and ex-post envy-free up to one good (where envy is only justified if another agent’s endowment is either smaller or worth less in equilibrium). A mechanism that selects a competitive core allocation is strategyproof in the large. Our framework can be used in many real-world market design applications, such as organ exchanges, tuition exchanges, time bank sharing, shift exchanges, and resource reallocation.

The Hidden Cost of Zero-Commission

solo-authored

Working Paper: Extended Abstract @25th ACM Conference on Economics and Computation (EC'24), 2024

Online platforms like Robinhood promote ‘zero-commission’ trading, but in reality, they hide their transaction costs. What are the implications for market design?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Transaction costs are ubiquitous in two-sided markets. However, to attract market participants, some market platforms promote `zero commission' models that, in reality, conceal these costs. In this paper, I examine how transaction cost transparency affects incentives and market performance. I show that hidden transaction costs induce additional volatility in the form of price cycles in markets that would be stable if transparent transaction costs were charged. To compete with the profit opportunities from price cycles, platforms with transparent costs must reduce them below the optimal monopolist level to attract traders. In this duopoly, I show that there is a market equilibrium: more risk-averse market participants prefer transparent transaction costs, while less risk-averse market participants choose hidden costs. Depending on the distribution of risk attitudes, transparent transaction costs can be more or less efficient than hidden transaction costs. Finally, I show that hidden transaction costs can potentially lead to market failure, as forward-looking and patient market participants may exploit price cycles by strategically placing more aggressive orders.

Double Auctions and Transaction Costs

Working Paper: Extended Abstract @23rd ACM Conference on Economics and Computation (EC'22), 2022

Transaction costs are ubiquitous in markets. How do they affect incentives and market performance, and how should they be designed with strategic traders?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs---such as fixed and price fees---incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs---such as spread fees---can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders' beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.

Foundations of Double Auctions from Theory and Practice

Working Paper

Double auctions are ubiquitous in financial markets, but there is a disconnect between their theoretical models and practical implementations. How can we bridge this gap, and what new insights can we gain from doing so?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

Double auctions are among the most widespread market mechanisms that clear demand and supply in two-sided markets, notably on major stock exchanges. In this paper, we provide the first unified definition of double auctions that applies to both finite and infinite markets and is well-behaved in the limit. Our Double Auction not only nests earlier formulations but also allows us to formalize the Reference-Price Double Auction commonly used on stock exchanges. In contrast to prior work, our definition does not rely on any regularity assumptions, and allows ties and gaps in reported values, two phenomena occurring in practice. We axiomatize Double Auctions in general as well as the prominent pricing rules. Finally, we provide necessary and sufficient conditions on traders' beliefs under which our Double Auction is asymptotically incentive-compatible, implying, in particular, that it is always Strategy-Proof in the Large.

Competitive Market Behavior: Convergence and Asymmetry in the Experimental Double Auction

Barbara Ikica | Heinrich Nax | Diego Nunez Duran | Bary Pradelski

International Economic Review 64 (3), 2023, p.1087-1126

Continuous double auctions are at the heart of modern financial exchanges. What insights do controlled continuous double auction experiments provide about convergence to competitive equilibrium and individual trading behavior?

Show a short answer

Show abstract

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

We conducted a large number of controlled continuous double auction experiments to reproduce and stress-test the phenomenon of convergence to competitive equilibrium under private information. A common finding across a total of 104 markets (involving over 1,700 subjects and over 100 markets) is convergence after a handful of trading periods. Initially, however, there is evidence for an inherent asymmetry that favors buyers, which is expressed in symmetric markets by deal prices that are significantly below equilibrium prices. Analysis of over 80,000 observations of individual bids and asks helps identify several empirical ingredients contributing to the observed phenomena including higher initial aggressiveness amongst buyers than sellers.

Minimax and Sports: (i) Tennis, and (ii) Football/Soccer Penalties

Draft available upon request

A long-standing folk result claims that professional sports stars play Minimax a la von Neumann. Is this really true?

Show a short answer

It is a long established fact that a reader will be distracted by the readable content of a page when looking at its layout. The point of using Lorem Ipsum is that it has a more-or-less normal distribution of letters, as opposed to using 'Content here, content here', making it look like readable English. Many desktop publishing packages and web page editors now use Lorem Ipsum as their default model text, and a search for 'lorem ipsum' will uncover many web sites still in their infancy. Various versions have evolved over the years, sometimes by accident, sometimes on purpose (injected humour and the like).

abstract

Resistors in Dual Networks

Martina Furrer | Norbert Hungerbühler

(based on my Bachelor’s Thesis) E. J. Graph Theory Applications 8(2), 257-265 (2020)