- Combinatorial Options Markets
- Project Year:
2021
- REU Student (s):
Jacob Gorenburg | Haverford College PA
- Student 1 Institution:
Haverford College
- Project Mentor:
David Pennock
- Project Mentor Area:
DIMACS
- Project Abstract:
This paper is an extension of the work done by Xintong Wang, David Pennock, and others on combinatorial options markets. Their original paper focused on the design and time complexity of an exchange that accepts call and put options on multiple stocks in a single bundle. These options give traders greater flexibility and precision in their trading. The original work focused on determining the optimal match in single-instance auctions. We extend this in two ways: providing a system for transferring the surplus from these trades back to the traders and designing a continuous combinatorial auction. One of the key principles of modern exchanges is that their profits come from a small fee on every trade, not from any surplus that occurs during the course of trading. If one trader is willing to buy a stock at a given strike price for $10 and another is happy to sell for $7, the $3 surplus is given to whichever trader placed the second bid. In a normal market, the surplus is always a flat amount since identical options are being bought and sold. However, in a combinatorial market, the surplus potentially also contains a variable surplus that depends on the relative successes of the various options. In this paper, we propose a method of transferring the surplus in a combinatorial market from the exchange to a trader by providing them with a bundle of options. In addition to dealing with the surplus, this paper extends the idea of a combinatorial market to the continuous-style auctions found in real-world exchanges. Wang's work focuses on a single-instance auction where all offers are collected and a single optimal match is returned. In practice, most markets are running continuously and decide on trades when new bids are placed. This style of auction allows for faster trading and benefits quick traders over those with better offers. In this paper we introduce a mechanism for a continuous combinatorial market and make some progress on an algorithm for running one.
