MICRO/THEORY: Random Double Auction: A Robust Bilateral Trading Mechanism;Dr Wanchang Zhang (CUHK Shenzhen)

Abstract:

I propose a novel random double auction as a robust bilateral trading mechanism for a profit-maximizing intermediary. It operates as follows. The intermediary publicly commits to charging a fixed commission fee and randomly drawing a spread from a uniform distribution. The buyer and seller simultaneously submit bid and ask prices. If the bid-ask difference exceeds the realized random spread, the asset is sold at the midpoint price, with each party paying half the fixed commission fee. Otherwise, no trade takes place. I show that the random double auction is a dominant-strategy mechanism, guarantees positive profits, and maximizes the profit guarantee.

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