At the other extreme is the Dutch auction, familiar to 17th-century tulip-traders in the Netherlands as well as to bidders for American Treasury bonds. Here, buyers remain silent, and a seller reduces his price until it is accepted. Most markets for shares, commodities, foreign exchange and derivatives are a hybrid of these two types: buyers and sellers can announce their bid or offer prices at any time, and deals are constantly being closed, a so-called continuous double auction .
Mr Cliff s novel idea was to apply his evolutionary computer programs to marketplaces themselves. Why not, he thought, try and see what types of auction would let traders converge most quickly towards an equilibrium price? The results were surprising. In his models, auctions that let buyers and sellers bid at any time like most of today s financial exchanges were less efficient than ones that required relatively more bids from either buyers or sellers. These evolved auctions also withstood big market shocks, such as crashes and panics, better than today s real-world versions. Mr Cliff s most recent results, which will be presented in Sydney, Australia, on December 10th, show that the best type of auction for any market depends crucially on even slight differences in the number of buyers and sellers.
Bank of America has been investigating these new auctions, along with robotic traders, for possible use in electronic exchanges. The hope is that today s financial auctions and online marketplaces might work better by becoming more like their English and Dutch forebears. But what to call such multi-ethnic hybrids? Here s introducing the Cliffhanger .
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