Do you envision scenarios where this new expressiveness is used in strategic but not market efficient ways? For instance, in the SNAP example, presumably the correlate to price improvement when purchasing as a substitutable hedge is a price premium when purchasing a specific equity, as market participants can deduce -- in a way that they previously could not -- that there's something inherent to SNAP that one (or the market) values. I don't know if it's possible under the mechanics of your ATS, but this seems to produce an incentive to obfuscate such a purchase of SNAP specifically, potentially in ways that detract from market efficiency. Am I off base? To put it more generally I wonder whether this higher dimensionality might not lead to more sophisticated game-theoretic posturing, rather than less.
This is a great question, and the full answer involves lots of mechanism design nuance. The short answer is that we have uniform clears per trading instrument, and bids are sealed, so there's no direct signaling game that would allow someone to try to pass off an alpha trade as a hedge. We plan to introduce a mechanism that will enable signaling through tokens (opaque identifiers). Bidders can attach whatever token they want, and other bidders can price discriminate against tokens (change their prices for, refuse to trade with, trade exclusively with) based on historical post-trade outcomes that we make known via an immutable audit trail. Participants can create and use tokens freely, so it's not segmentation. Instead, it's a means of inducing a repeated play game and a market for reputation.
Comments
Do you envision scenarios where this new expressiveness is used in strategic but not market efficient ways? For instance, in the SNAP example, presumably the correlate to price improvement when purchasing as a substitutable hedge is a price premium when purchasing a specific equity, as market participants can deduce -- in a way that they previously could not -- that there's something inherent to SNAP that one (or the market) values. I don't know if it's possible under the mechanics of your ATS, but this seems to produce an incentive to obfuscate such a purchase of SNAP specifically, potentially in ways that detract from market efficiency. Am I off base? To put it more generally I wonder whether this higher dimensionality might not lead to more sophisticated game-theoretic posturing, rather than less.
This is a great question, and the full answer involves lots of mechanism design nuance. The short answer is that we have uniform clears per trading instrument, and bids are sealed, so there's no direct signaling game that would allow someone to try to pass off an alpha trade as a hedge. We plan to introduce a mechanism that will enable signaling through tokens (opaque identifiers). Bidders can attach whatever token they want, and other bidders can price discriminate against tokens (change their prices for, refuse to trade with, trade exclusively with) based on historical post-trade outcomes that we make known via an immutable audit trail. Participants can create and use tokens freely, so it's not segmentation. Instead, it's a means of inducing a repeated play game and a market for reputation.