Trading Financial Derivatives on the Web - An Approach Towards Automating Negotiations on OTC Markets

Derivative instruments have become increasingly important to financial institutions, institutional investors, traders and private individuals throughout the world, both as risk-management tools and as a source of revenue. The volume of over-the-counter (OTC) traded derivatives has increased enormously over the past decade, because institutional investors have often had a need for special derivative products which are not traded on organized exchanges. An important feature of OTC trading is the bargaining on multiple attributes of a contract such as price, strike price and contract maturity. Negotiation on multiple attributes of a deal is currently not supported by electronic trading floors. In this paper we describe an approach of how to automate the multi-attribute multilateral negotiations using a Web-based trading system. First, we will give an overview of various approaches to supporting or automating negotiations on multiple attributes. Then we will introduce multi-attribute auctions, an extension of single-sided auction theory and analyze preliminary game-theoretic results. Finally, we will show a Web-based electronic trading system for OTC derivatives, based on multi-attribute auctions.