Random Double Auction: A Robust Bilateral Trading Mechanism
I construct a novel random double auction as a robust bilateral trading mechanism for a profit-maximizing intermediary who facilitates trade between a buyer and a seller. It works as follows. The intermediary publicly commits to charging a fixed commission fee and randomly drawing a spread from a uniform distribution. Then the buyer submits a bid price and the seller submits an ask price simultaneously. If the difference between the bid price and the ask price is greater than the realized spread, then the asset is transacted at the midpoint price, and each pays the intermediary half of the fixed commission fee. Otherwise, no trade takes place, and no one pays or receives anything. I show that the random double auction maximizes the worst-case expected profit across all dominant-strategy incentive compatible and ex-post individually rational mechanisms for the symmetric case. I also construct a robust trading mechanism with similar properties for the asymmetric case.
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