System and method for automated market making
AssigneesThe Regents of the University of California, President and Fellows of Harvard College
InventorsYiling Chen, Jennifer Wortman Vaughan, Jacob Duncan Abernethy
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Abstract
Method and systems for design and operation of a prediction market. A plurality of security bundles and a plurality of payoff vectors may be defined, such that each payoff vector in the plurality of payoff vectors is associated with at least one outcome in a plurality of outcomes. A prediction market engine may be provided for determining a price for each security bundle in the plurality of security bundles by using at least one processor to minimize a convex function over a convex set comprising a convex hull of the plurality of payoff vectors.
Claims11
A computer-implemented method of designing a prediction market, the method comprising:
- defining a plurality of security bundles and a plurality of payoff vectors, wherein each payoff vector in the plurality of payoff vectors is associated with an outcome in a plurality of outcomes;
- and
- determining, using at least one processor, a price for each security bundle in the plurality of security bundles by using at least one processor to minimize a convex function over a convex set comprising a convex hull of at least one vector in the plurality of payoff vectors.
The method of concept 1, wherein the convex set is equal to the convex hull of the at least one vector in the plurality of payoff vectors.
The method of concept 1, wherein the at least one vector in the plurality of payoff vectors comprises all the vectors in the plurality of payoff vectors.
The method of concept 1, wherein the determining further comprises:
- representing the convex set using a number of linear inequality constraints, wherein the number is a polynomial function of a number of outcomes in the plurality of outcomes.
The method of concept 1, wherein the convex function is either a relative entropy function or a norm.
The method of concept 1, wherein a market maker operates the prediction market and the market maker's worst-case monetary loss is bounded.
The method of concept 1, wherein each outcome in the plurality of outcomes is a ranking of M competitors and each security bundle comprises a bet that competitor i is ranked at position j, where i and j are integers between 1 and M, inclusive.
The method of concept 7, wherein the convex hull is a set of all M by M doubly stochastic matrices.
At least one non-transitory computer-readable storage medium storing processor-executable instructions that, when executed by at least one processor, cause the at least one processor to perform a method of determining a price for each security bundle in a plurality of security bundles, the method comprising:
- minimizing a convex function over a convex set comprising a convex hull of a plurality of payoff vectors,
- wherein each payoff vector in the plurality of payoff vectors is associated with an outcome in a plurality of outcomes.
A computer-implemented method of operating a prediction market, the method comprising:
- presenting, using at least one processor, a plurality of security bundles together with a price for each security bundle to a plurality of prediction market participants;
- receiving, using the at least one processor, an order from a participant in the plurality of prediction market participants;
- and
- sending, using the at least one processor, a response to the participant notifying the participant that the order has been accepted,
- wherein each payoff vector in a plurality of payoff vectors is associated with at least one outcome in a plurality of outcomes and the price for each security bundle is determined by using the at least one processor to minimize a convex function over a convex set comprising a convex hull of the plurality of payoff vectors.
A system for operating a prediction market, the system comprising:
- at least one processor configured to:
- calculate a price for each security bundle in a plurality of security bundles by minimizing a convex cost function over a convex set comprising a convex hull of the plurality of payoff vectors, wherein each payoff vector in the plurality of payoff vectors is associated with an outcome in a plurality of outcomes;
- output the plurality of security bundles together with the corresponding prices to a plurality of prediction market participants;
- receive an order from a participant in the plurality of prediction market participants,
- wherein the system is configured to output a response to the participant notifying the participant that the order has been accepted.
Dependencies are inferred from the claim text.