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Evolution of Market Mechanism Through a Continuous Space of Auction-Types III: Multiple Market Shocks Give Convergence Toward CDA

Cliff, Dave

HPL-2002-312

Keyword(s): algorithmic mechanism design; auction and negotiation technology; automated trading; ZIP traders; genetic algorithms; e-marketplaces

Abstract: This paper builds on previous papers describing our ongoing research in automated market-mechanism design: using a genetic algorithm (GA) to find optimal parameter-settings for software-agent traders that operate in virtual "e-marketplaces", where the rules of the marketplaces are also under simultaneous control of the GA. The aim is that the GA automatically designs new agent-based e-marketplaces that are more efficient than existing markets designed by (or populated by) humans. Das et al. recently demonstrated that ZIP software-agent traders consistently out-perform human traders in Continuous Double Auction (CDA) marketplaces similar to those used in the international financial markets. Cliff used a GA to explore a continuous space of ZIP-trader auction-market mechanisms, where the space of possible auction-types explored included the CDA and also two purely one-sided mechanisms. Surprisingly, the GA would sometimes settle on novel hybrid auction mechanisms partway between the CDA and a one-sided auction. Such results occurred when the market's supply and demand schedules were unchanging, and also when the schedules undergo a single sudden "shock" change halfway through the evaluation process. These results could prima facie support the hypothesis that hybrid auctions are in general preferable to the well- known CDA mechanism. In this paper we present new results that clarify that hypothesis. In our new experiments, more than one shock-change in supply/demand occurs during the mechanism-evaluation process; under this regimen, CDA auction-mechanisms are identified by the GA as optimal in three of the four experiments reported here, and in the fourth experiment a near-CDA hybrid mechanism was evolved. From these results we conclude that, while evolved hybrid market-mechanisms may be useful in niches where the marketplace's supply and demand dynamics are known a priori to be relatively stable or regular, the CDA remains the mechanism of choice when it is difficult or impossible to make accurate predictions concerning the dynamic stability of the supply and demand schedules.

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