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Academic Lecture: Flow Trading

Speaker: Albert S. (Pete) Kyle, Professor, University of Maryland

Moderator: Philip H. Dybvig, Institute of Financial Studies, SWUFE

Time: 9:00 July 16, 2021

Virtual Platform: ZOOM, SWUFE students and faculties please email to to obtain the meeting code for ZOOM. Others please send email with your CV attached.

Organizers: Institute of Financial Studies, Office of International Exchange and Cooperation, Research Office

Speaker’s Profile

Professor Albert S. (Pete) Kyle is a Distinguished University Professor at the Smith School of Business, University of Maryland, where he has been the Charles E. Smith Chair Professor of Finance since 2006. He earned his B.S. degree in mathematics from Davidson College (summa cum laude, 1974), studied philosophy and economics at Oxford University as a Rhodes Scholar from Texas (1974-1977), and completed his Ph.D. in economics at the University of Chicago in 1981. He has been a professor at Princeton University (1981-1987), the University of California Berkeley (1987-1992), and Duke University (1992-2006). His current research focuses on market microstructure invariance and smooth trading. More generally, his research areas are market microstructure, including topics such as high frequency trading, informed speculative trading, market manipulation, price volatility, the informational content of market prices, market liquidity, and contagion. His teaching interests include market microstructure and institutional asset management, and asset pricing. He is the 2018 recipient of The CME Group--MSRI Prize in Innovative Quantitative Applications, a fellow of the American Finance Association (2014), and a fellow of the Econometric Society (since 2002). He holds an honorary doctoral degree from the Stockholm School of Economics (2013) and from USI, Switzerland (2021). He has been a board member of the American Finance Association (2004-2006), a staff member of the Presidential Task Force on Market Mechanisms (Brady Commission, 1987), a consultant to the SEC's Office of Inspector General, a member of NASDAQ’s economic advisory board (2005-2007), a member of the FINRA economic advisory committee (2010 to present), and a member of the CFTC’s Technology Advisory Committee (2010-2011).

Lecture Preview

We propose a new market design for trading financial assets. Our design combines three elements: (1) Traders submit persistent piecewise linear flow demand curves to trade in shares per second (Kyle and Lee, 2017). (2) Frequent batch auctions are held at regular intervals, such as once per second (Budish, Cramton, and Shim, 2015). (3) Traders may submit orders to trade portfolios of assets as if they were one asset. Market clearing quantities and prices are the solution to a quadratic program with linear constraints, constructed by attributing preferences to orders and maximizing imputed gains from trade. Clearing prices exist and define traded quantities uniquely. Calculating prices is computationally feasible. The market design corrects flaws in existing markets. It promotes economic efficiency by eliminating the arms race for speed and by reducing messaging costs. It fosters trust and confidence by improving transparency and simplifying participation. All executable orders trade at the same prices at the same time. There is no need for a time priority rule to ration executions at the best bid or best offer. Our contribution combines three elements: (1) a market design that implements trading portfolios, (2) a simple language for preference expression, and (3) existence, uniqueness, and numerical results to establish proof-of-concept. Our approach facilitates liquidity over time and pools liquidity across interrelated assets.