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Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

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Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#61

Post by sjbase »

josh2600 wrote: post #53

Is this only effective at small scale? Many of the biggest hedge funds in the world that do high frequency make money by effectively front-running the book. If you are executing these trades across exchanges I don't see how you don't get front-run by HF firms. This is the same problem eth et al are dealing with in crypto swaps due to Miner Extracted Value (reordering the tx in the block to favor miners extracting val…

The funny thing about the emergence of HFT is that if you truly only have a hundred or so shares to buy/sell it's quite cheap and easy to do that now. Atomicity and substitutability isn't as important if there's plenty of liquidity relative to the size you're trading.

The harder problem that large traders face is executing blocks and portfolio trades. How do you figure out what your total transaction cost (market impact / cost of liquidity) will be if you're buying 100x the displayed volume? Being able to express where you are flexible (e.g. individual security prices) and aren't flexible (aggregate price, atomicity) helps lock in the uncertainty pre-trade.

So we're actually mostly going after the large scale stuff, more than the small scale.

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#62

Post by sjbase »

high_derivative wrote: post #57

How is your team organized? Is it US only or are there international/remote roles?

The company is US based but we're entirely open to remote work especially for engineering, and already have a handful of fully remote staff.

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#63

Post by matheist »

Can you say more about how you incentivize truthful bidding? I understand about exposure risk and expressive bidding but I'm not sure if that was meant to obviously imply something about truthful bidding which went over my head, or if you meant to not say more about it.

I love the part about eventually determining your value-add by comparing to a counterfactual vanilla market -- sounds a bit like Shapley value? If not exactly Shapley value?

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#64

Post by throwmeawaysoon »

matheist wrote: post #63

Can you say more about how you incentivize truthful bidding? I understand about exposure risk and expressive bidding but I'm not sure if that was meant to obviously imply something about truthful bidding which went over my head, or if you meant to not say more about it. I love the part about eventually determining your value-add by comparing to a counterfactual vanilla market -- sounds a bit like Shapley value? If no…

i'm not an economist or a game theorist so i don't remember the details but this paper talks about how certain market designs lead to untruthful bidding

https://www.cs.cmu.edu/~sandholm/vickrey.IJEC.pdf

but in the context of second price auctions.

lpage might be alluding to something having to do with their proxy bidder implementation but the above paper actually discusses how proxy bidders themselves lead to untruthful bidding (so maybe lpage is suggesting their implementation is better?).

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#65

Post by rwissmann »

lpage wrote: post #14
rwissmann wrote: post #7

Earlier quoted context omitted.

Exciting implementation of a really cool concept. > Today's market structure costs institutional investors (and by extension households) at least a trillion dollars annually (and Smart Markets hold the potential to eliminate that loss). How does one get to this estimate? That is ~5% of US GDP. Everything else was easy to follow - this seemed high, at least intuitively.

It's a huge number that only makes context when looking at the absurd scale of capital markets globally. BlackRock has written on the cost of liquidity [1]. Unfortunately, much of the institutional research on this topic is in a walled garden, so we plan on publishing on this when we have our own data. Treating it as a Fermi problem, the market cap of US equities is ~50T and 140T notional of US equities traded in 202…

You can get to big numbers on global capital markets, for sure. I was wondering whether you a consulting/VC-style estimate given how specific the statements was: "Smart Markets hold the potential to eliminate that loss" of "at least a trillion dollars annually".

How do you think about it? Let's say we expect half the benefit to come from equities.

>> 0.5T / 125 T = 0.004

>> Smart Markets would need to raise portfolio returns by an average of .4% (net of trading costs) annually.

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#66

Post by lpage »

vagabund wrote: post #52
lpage wrote: post #34

Earlier quoted context omitted.

Great question! Complements in capital markets typically aren't as strong as other markets like event tickets. On the complements side, hedges are a good example. Market makers like banks are willing to quote much larger sizes for hedged transactions, e.g., an institution that wants to buy a large block of equity in one company while selling others with similar qualities as "factor hedges." The net notional changing…

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…

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.

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#67

Post by sjbase »

monkeydust wrote: post #60

Trying to get a feel for how much liquidity you need to successfully execute on the complex expressive orders that might tie in multiple securities... Is it common that these types of orders run for many auctions, day, days or more to be fulfilled?

Excellent question! The TL;DR is that substitutability and the ability to manage risk (e.g. execute hedges or constrain factor exposure atomically) can be great for inducing liquidity in the absence of large volume and high turnover.

On substitutability: if you want to sell $2m of some sector basket you wouldn't put in a limit order for $2m in every security (overfill risk). An expressive order can enforce a $2m global constraint across the basket but show full size in each security. When lots of people are doing this, it solves the "ships passing the night" problem where people are looking for offsetting exposure at a high level but can't express anything but single stock orders.

On risk management: some constraints certainly are restrictive, e.g. conjunctive constraints like 'a' AND 'b' AND 'c'. It would be very unlikely that we find the exact opposite of that constraint, so the auction is multilateral: we can stitch together the contra with individual single orders for 'a', 'b', 'c'. Key to the liquidity aspect of this is our objective function: it rewards more aggressive pricing and larger quantities. So the principle here is that by gaining atomicity (and reducing uncertainty) people can be more aggressive on price and qty. This is especially important for liquidity provision: how much larger size could market makers quote if they could automatically hedge new positions they enter into?

All that said, bootstrapping liquidity is the hardest part of any venue launch. We're obsessively focused on making sure we have the right blend of participants trading on different horizons for a healthy pool.

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#68

Post by lpage »

matheist wrote: post #63

Can you say more about how you incentivize truthful bidding? I understand about exposure risk and expressive bidding but I'm not sure if that was meant to obviously imply something about truthful bidding which went over my head, or if you meant to not say more about it. I love the part about eventually determining your value-add by comparing to a counterfactual vanilla market -- sounds a bit like Shapley value? If no…

> Can you say more about how you incentivize truthful bidding? I understand about exposure risk and expressive bidding

Both the multiunit dynamics and the specifics of our uniform clearing price mechanic minimize ex-post regret. Double auctions suffer from the winners curse/adverse selection, as limit orders are always "traded through." Multiunit uniform clearing price mechanisms like OneChronos can lessen or eliminate that by incentivizing buyers and sellers to truthfully report aggregate supply and demand curves, and Expressive Bidding enables the reporting of supply and demand curves (among other things). NB: we are not an IC direct mechanism. We are balanced budget and individually rational.

I love the part about eventually determining your value-add by comparing to a counterfactual vanilla market -- sounds a bit like Shapley value? If not exactly Shapley value?

It's a hot take on both Shapley values and VCG (while avoiding the issues with both), and it's about to become an active area of research for us!

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#69

Post by sjbase »

grvdrm wrote: post #59

Gents, congrats on your launch from a friend in NYC! Have loved hearing about this despite understanding way less than you do about the markets, their problems, and your product. Glad to see you charging forward!

Thanks! It means a lot knowing people are out there rooting for us :)

Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities

#70

Post by lpage »

grvdrm wrote: post #59

Gents, congrats on your launch from a friend in NYC! Have loved hearing about this despite understanding way less than you do about the markets, their problems, and your product. Glad to see you charging forward!

Thank you!
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