A trading mechanism contingent on several indices

• Published in: European journal of operational research Vol. 213; no. 3; pp. 551 - 558
• Main Author: Schellhorn, Henry
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 16.09.2011; Elsevier; Elsevier Sequoia S.A
• Series: European Journal of Operational Research
• Subjects: Applied sciences; Auctions; Exact sciences and technology; Flows in networks. Combinatorial problems; Indexes; Limit orders; Market microstructure; Operational research and scientific management; Operational research. Management science; Operations research; Portfolio theory; Securities trading; Stock exchanges; Studies; Trading systems; Trading systems Limit orders Market microstructure; Market microstructure; Trading systems; Limit orders; Market structure; Stock exchange; Pricing; Financial market; Microstructure; Combinatorial optimization; Substitute; Economic equilibrium; Reverse auction
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2011.03.031

► The double-sided multi-unit combinatorial auction with substitutes. ► The problem of trading securities contingent on several indices. ► How to apply the DCMS auction to solve the latter problem. We introduce a trading mechanism where the execution of an order on a security can be made contingent on the relation between the clearing price of the security and the clearing price of one or several indices. A mechanism similar to ours, but limited to only one index, was implemented on the Tel Aviv Stock Exchange. We argue that it is in some cases crucial to make the execution of an order contingent on several indices. Our mechanism consists of a particular implementation of a double-sided multi-unit combinatorial auction with substitutes (or DMCS auction), which we introduced in an earlier article.