# Wall Street's version of a combinatorial market

Mar 032009

I was poking around TD AMERITRADE and came across this description of conditional orders (login required, or look here), or sequences of orders that are synchronized in various ways:

What is a conditional order and how do I place one?

Conditional orders let you combine two or three individual orders that will, if filled, either cancel or trigger additional orders. Conditional orders are available for both stocks and single-leg option orders (in option-approved accounts).

The following types of conditional orders are available:

• OCA (one cancels another) – submit two orders simultaneously; if one order is filled, the other is canceled.
• OTA (one triggers another) – submit an order and if that order is filled, submit another order.
• OTT (one triggers two) – submit an order and if that order is filled, submit two additional orders.
• OT/OCA (one triggers an OCA order) – submit an order; if that order is filled, submit two orders simultaneously; if one of these orders is filled, cancel the other.
• OT/OTA (one triggers an OTA order) – submit an order; if that order is filled, submit another order. If that order is filled, submit a third order.

At first glance these resemble combinatorial bids that allow traders to buy several things at once, but they’re not. They’re more like bidding agent programs that describe exactly what to do when under various conditions: more complex, but not fundamentally different, than limit orders and stop-loss orders. They can be executed without any cooperation from the exchange.

This brings to light a key distinction: some forms of expressiveness can be achieved by layering increasingly complicated bidding agents on top of an existing exchange. Other types of expressiveness, for example true combinatorial bids, require new optimization routines put directly into the exchange.

The distinction arises in advertising as well. In a sponsored search auction, advertisers can bid lower during the day when people tend to browse and higher in the evening when people tend to buy, and they can even write a program to do it for them automatically. However an advertiser cannot execute a “guaranteed delivery” contract in sponsored search without changing the underlying auction mechanism.

Why should we care about the latter type of expressiveness that requires “smarter” exchange mechanisms? One word: efficiency. Economic efficiency, that is. With greater expressiveness, resources can be shuffled to align more precisely with who wants them the most. Advertising opportunities (a particular user’s attention on a particular page) can go to advertisers who value them most. Financial transactions that otherwise might go unmet can be consummated. Insurance buyers can get better coverage. And gamblers can have more fun.

### 3 Responses to “Wall Street's version of a combinatorial market”

1. FoolsGold says:

What about Fill or Kill orders?
A “Fill or Kill” for every combination would approach a truly Combinatorial Bid. If the agent then listed all the Kills, it could automatically re-submit them so as to approach the functionality of a Combinatorial Bid.

I don’t know if the ‘browse in the morning, buy in the evening’ scenario actually holds true particularly since its always “morning” somewhere and a bid could be coming in thru some workload balancing system that uses geographically remote servers during busy periods on the internet.

I don’t know how much someone might bid for a search term such as “earthquake preparedness” but I don’t think the amount would need fine tuning by time of day.

2. Thanks FoolsGold. I looked up Fill or Kill orders and this also came up in a recent presentation I gave.

Indeed, this is getting close to what I want, but not fully there. From what I understand, Fill or Kill type orders either must be filled immediately or are canceled. They cannot stay in the order book queue. Thus the exchange can process the order individually and either accept or reject it on the spot. The exchange does not need to examine more than one “FoK” order at a time.

A true combinatorial exchange would allow bundle bids to persist, would be able to match one bundle bid against another, and would be able to give proper price quotes that take into account bundle bids in its queue.

3. Ricky says:

Very interesting.

I have a TD Ameritrade account and never noticed the conditional order options before. It seems like they may be very useful.