Component-based Specification and Composition of Market Structures

The design of electronic markets is a time consuming process and often produces unpredictable results. This paper describes a component-based specification of the market microstructure parameters and their composition. In this approach, orthogonal components are defined by rules and algorithms. Composing these components results in a market structure an element of market space spanned by the components. The logical connection of the components themselves is based on rules, and has characteristics such as inheritance and overriding. The characteristics of the component-based approach propose a new way of designing electronic markets. 1 Motivation Market Engineering A market is a physical or virtual location where price is determined, and buy and sell orders are matched to create trades according to a set of rules that governs the processing of these orders. A central function of a market is the determination of price and conditions of the transaction. Many mechanisms are used to coordinate demand and supply in markets. These mechanisms vary from bilateral to more complex negotiations like multiattribute negotiations. In [WWW01] the authors argue, that “the task of designing negotiation rules is essentially that of designing auctions”. For example, financial markets employ several types of auctions like continuous double auction for price determination and allocation. Traditional markets have evolved over centuries. In contrast to traditional markets, electronic marketplaces have been designed and developed in recent years on the back of advances and innovation in information technology. To fulfil the heterogeneous preferences of the market participants, the market structure of any particular electronic marketplace has to be planned and designed properly, indeed, ‘engineered’. The discipline of Market Engineering [HNW02] aims at systematising theoretical and empirical knowledge in the area of market design. The market structure is a combination of three interdependent perspectives that determine the structure of an electronic market: market microstructure, market infrastructure and market business structure. The rules, which define an institution, can be subdivided into market microstructure, business structure, and infrastructure. The market microstructure defines the trading rules, the infrastructure defines rules given by the computerization of markets, and the business structure defines rules for the fee structure of the market. These three perspectives affect the strategic behaviour of the participants and the market outcome. Knowledge about the influence of the structural parameters on the quality of the market helps the market designer construct better markets. Concrete assistance might consist of practical advice, for example, in the form of templates. Such templates include one or more components required by a market. This paper presents an approach for the definition of such components. Section 2 presents related work. Section 3 offers a definition of a market component and the composition of market components to a new market structure. Section 4 presents both the composition of components as a hierarchical structure, and its analogy to inheritance in object-oriented software engineering. The final section concludes with a brief outlook on future work.