Auths

In a flow trading market, bidders create submissions out of various bid primitives. There are only two such primitives: an auth and a cost. This guide provides an explanation for the former.

What is an Auth?

An auth, short for “authorization”, is an explicit definition of a portfolio of products and a demand curve to express willingness-to-trade.

What is a Portfolio?

In flow trading, products are not traded directly. Rather, each bidder defines portfolios of products, then trade these portfolios in strict, proportional accordance with the weights in the portfolio.

Suppose a market contains products A and B (among others). The following are all examples of portfolios:

// A "singleton" portfolio that trades only A
P1 = { A: 1.0 }
// A portfolio that trades both A and B **in equal amounts**
P2 = { A: 1.0, B: 1.0 }
// A portfolio that replaces A with B (or vice versa)
P3 = { A: 0.5, B: -0.75 }

There are no restrictions on the signs or magnitudes of the weights. Buying 1 unit of a portfolio will buy 1 times the associated weight for each underlying product; selling 1 unit will do the same. Flow trading assumes the unifying convention of buying as positive demand and selling as negative demand. Thus, buying 4 units of P3 corresponds to buying 2 units of A and selling 3 units of B.

What is a demand curve?

A demand curve is a weakly monotone decreasing function r(p) which expresses a desired rate of trade as a function of price. All auths must specify a demand curve for the associated portfolio. There are two ways to specify this function: either as a list of points, defining a piecewise linear function, or as an object declaring a minimum and maximum rate and a constant price.

We saw examples of both in the Simple Trading Session:

// An example with a piecewise-linear definition of a demand curve
{
  "portfolio": { "EXAMPLE_PRODUCT": 1 },
  "data": {
    "demand": [{ "rate": 0, "price": 15 }, { "rate": 20, "price": 5 }]
  }
}

and

// An example with a constant-price definition of a demand curve
{
  "portfolio": { "EXAMPLE_PRODUCT": 1 },
  "data": {
    "demand": { "max_rate": 0, "price": 10 }
  }
}

In the second example, notice that while the max_rate is set to 0, there is no min_rate. This demand curve can only sell the portfolio. In the first example, though it uses the piecewise-linear specification, this curve admits only non-negative rates in its range, so it can only buy the portfolio.

The only restriction on the demand curve is that rate = 0 must exist within its range.

Summary

In flow trading, products are not directly bid upon. Instead, each bidder authorizes trade on strictly-weighted portfolios of products. An auth is this pair: the portfolio and a demand curve that both constrains the feasible trade as well as expresses preferences over outcomes. Costs (discussed next) are a generalization of auths, allowing for substitution effects to take place over related portfolios.