Random Double Auction: A Robust Bilateral Trading Mechanism

TL;DR

This paper introduces a novel random double auction mechanism that enhances profit robustness for intermediaries in bilateral trading by using a randomized spread and fixed commission, ensuring optimal worst-case expected profit.

Contribution

It develops a new robust bilateral trading mechanism that maximizes worst-case profit for a profit-maximizing intermediary, applicable to both symmetric and asymmetric cases.

Findings

Maximizes worst-case expected profit among incentive-compatible mechanisms.

Works effectively for both symmetric and asymmetric trading scenarios.

Ensures ex-post individual rationality and dominant-strategy incentive compatibility.

Abstract

I construct a novel random double auction as a robust bilateral trading mechanism for a profit-maximizing intermediary who facilitates trade between a buyer and a seller. It works as follows. The intermediary publicly commits to charging a fixed commission fee and randomly drawing a spread from a uniform distribution. Then the buyer submits a bid price and the seller submits an ask price simultaneously. If the difference between the bid price and the ask price is greater than the realized spread, then the asset is transacted at the midpoint price, and each pays the intermediary half of the fixed commission fee. Otherwise, no trade takes place, and no one pays or receives anything. I show that the random double auction maximizes the worst-case expected profit across all dominant-strategy incentive compatible and ex-post individually rational mechanisms for the symmetric case. I also construct a robust trading mechanism with similar properties for the asymmetric case.