Date: 20 Aug 2002

A New Approach to the Design of Electronic Exchanges

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Abstract

Electronic Exchanges are double-sided marketplaces that allows multiple buyers to trade with multiple sellers, with aggregation of demand and supply across the bids to maximize the revenue in the market. In this paper, we propose a new design approach for an one-shot exchange that collects bids from buyers and sellers and clears the market at the end of the bidding period. The main principle of the approach is to decouple the allocation from pricing. It is well known that it is impossible for an exchange with voluntary participation to be e.cient and budget-balanced. Budget-balance is a mandatory requirement for an exchange to operate in profit. Our approach is to allocate the trade to maximize the reported values of the agents. The pricing is posed as pay-off determination problem that distributes the total payo. fairly to all agents with budget-balance imposed as a constraint. We devise an arbitration scheme by axiomatic approach to solve the payoff determination problem using the added-value concept of game theory.

This research is supported in part by IBM Research Fellowship awarded to the first author by IBM India Research Laboratory, New Delhi