1. Trading of Complex Commodities Josh Johnson

2. Trading Buyers Sellers

3. For Example Car Buyers Car Dealers

4. Another Example Car Buyers Car Dealers Manufacturers

5. Central Marketplace Marketplace

6. Central Marketplace Marketplace Necessary?

7. Central Marketplace Bulletin board Necessary?

8. Central Marketplace Bulletin board Middleman Necessary?

9. Central Marketplace Bulletin board Middleman Auction Necessary?

10. Central Marketplace Bulletin board Middleman Auction Exchange Necessary?

11. Examples of Exchanges Stock/Commodity exchanges Specialized exchanges (e.g. specialist systems)

12. Example of an Order Buy a red Mustang

13. Example of an Order Buy a red Mustang, less than 2 years old

14. Example of an Order Buy a red Mustang, less than 2 years old, willing to pay $25,000

15. 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

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

17. General Case An order describes a set of items, such as the Mustangs and Corvettes. The buyer wants to get one of these items.

18. Graphical View of an Order Space of all items

19. Graphical View of an Order Space of all items Red Mustangs less than 2 years old

20. Graphical View of an Order Space of all items Red Mustangs less than 2 years old All color Corvettes made this year

21. Price Space of all items $25,000 $30,000 Mustangs Corvettes Price is a function of an item. Price

22. Buy and Sell Orders Price Buy order

23. Buy and Sell Orders Price Buy order Price Sell order

24. Matching Two orders match if they intersect…

25. Matching Two orders match if they intersect… Price Buy order

26. Matching Two orders match if they intersect… Price Buy order Sell order

27. 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

28. 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

29. 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

30. 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

31. Fill A result of trading, that is, an item that matches both orders.

32. Fill A result of trading, that is, an item that matches both orders. Price Buy order Sell order

33. Formal Definition An order is an item set I

34. Formal Definition An order is an item set I, and a function Price: I R +

35. Formal Definition An order is an item set I, and a function Price: I R + A fill is an item

36. 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

37. Matcher Engine Limitations: Specific items in sell orders Restrictions on buy item sets No price functions

38. Specific Sell Orders Good: Sell a red Mustang made in 1999 Bad: Sell any color Mustang made before 1999

39. Restrictions on Buy Item Sets Year Color Good: Year Color Bad:

40. No Price Function Price Good: Price Bad:

41. Matcher Architecture Matcher

42. Matcher Architecture Matcher User interface User interface User interface Orders Fills

43. Matcher Architecture Matcher Index of sell orders List of buy orders User interface User interface User interface Orders Fills

44. Trading Cycle Process all incoming orders Re-match all pending orders Stop trading? Yes No

45. Matching Process For each buy order, search the indexing structure for matching sell orders When finding matches, generate fills

46. Fairness Prefer matches with better prices Give priority to better-price orders Give priority to earlier orders

47. Extensions Order modification Disjunctive orders Confirmations

48. Running Time Almost linear in the number of orders Almost linear in the length of order description Memory is the main bottleneck.

49. Performance 400 MHz PC with 384 Mbytes memory, C++ implementation under Windows NT: 100,000 pending orders 500 new orders per second

50. Extended Architecture Matcher Broker User Interface User Interface User Interface Broker Orders Fills Orders Fills Orders Fills Orders Fills Orders Fills

51. Extended Architecture Matcher Broker User Interface User Interface User Interface Broker Orders Fills Orders Fills Orders Fills Orders Fills Orders Fills Distributed Matcher

52. Broker Functions Pre-compile complex orders Handle price functions Handle complex item sets Shield the user from processing delays Support automated trading

53. Advantages Fewer limitations on orders Extra features Distributed computation

54. Coming Soon Broker algorithms Empirical performance study