Smarter Markets: Bringing Intelligence into the Exchange

David M. Pennock

Abstract: Billions of dollars in financial securities exchange hands every day in independent continuous double auctions. Although the auctions are automated, fast, open 24-7, and have worldwide scope and massive scale, the underlying auction rules have not changed much for over 100 years. Advertisement auctions, on the other hand, have rapidly evolved, incorporating optimization and machine learning directly into their allocation rules. The downside is a less-transparent auction, but the upsides for efficiency and expressiveness are tremendous. The trend toward smarter markets will expand into finance and well beyond, pervading how markets are designed. I will discuss markets that optimize and learn, using prediction markets and advertising markets as key examples.