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Register a new userA Unified Framework for Dynamic Pari-Mutuel Information Market Design
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Recently, several new pari-mutuel mechanisms have been introduced to organize markets for contingent claims. Hanson introduced a market maker derived from the logarithmic scoring rule, and later Chen and Pennock developed a cost function formulation for the market maker. On the other hand, the SCPM model of Peters et al. is based on ideas from a call auction setting using a convex optimization model. In this work, we develop a unified framework that bridges these seemingly unrelated models for centrally organizing contingent claim markets. The framework, developed as a generalization of the SCPM, will support many desirable properties such as proper scoring, truthful bidding (in a myopic sense), efficient computation, and guarantees on worst case loss. In fact, our unified framework will allow us to express various proper scoring rules, existing or new, from classical utility functions in a convex optimization problem representing the market organizer. Additionally, we utilize concepts from duality to show that the market model is equivalent to a risk minimization problem where a convex risk measure is employed. This will allow us to more clearly understand the differences in the risk attitudes adopted by various mechanisms, and particularly deepen our intuition about popular mechanisms like Hansons market-maker. In aggregate, we believe this work advances our understanding of the objectives that the market organizer is optimizing in popular pari-mutuel mechanisms by recasting them into one unified framework.
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We consider the problem of designing a derivatives exchange aiming at addressing clients needs in terms of listed options and providing suitable liquidity. We proceed into two steps. First we use a quantization method to select the options that should be displayed by the exchange. Then, using a principal-agent approach, we design a make take fees contract between the exchange and the market maker. The role of this contract is to provide incentives to the market maker so that he offers small spreads for the whole range of listed options, hence attracting transactions and meeting the commercial requirements of the exchange.
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