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0026-AUCT-auctions.md

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Auctions

Auctions are a trading mode that 'collect' orders during an auction call period which may end at a specified time or be of indefinite length, ending when some condition is met. During the call period, no trades are created. At the conclusion of the call period, trades are produced in a single action known as an auction uncrossing. Auctions always try to maximise the traded volume (subject to the requirements of the orders placed) during the uncrossing. The price at which uncrossing occurs, and therefore the price assigned to the trades created during it can be determined via a number of algorithms. This spec described auction types, configuration and mechanics on Vega.

Guide-level explanation

In comparison to continuous trading, the auction mode for a market, is a state of the orderbook where each order placed is just sitting on the book, for a given period of time or until some requirements are met (called call period), then the matching orders are uncrossed.

They are mostly useful in less liquid markets, or in specific scenarios where a price must be determined, i.e. at opening of a market, when a potentially excessively large price move might occur (price monitoring). In traditional markets (where markets open and close every day) we can run an open and closing auction for the price to stabilise at both ends.

Reference-level explanation

As mentioned earlier, this specification introduces new trading modes.

  1. General auctions
  2. Opening auctions: purpose is to calibrate a market / help with price discovery when a new market is started.
  3. Frequent batch auctions: a trading mode that may be set as the default / normal mode that has trading occur only through repeated auctions (as opposed to continuous trading)

Auction config

All auctions have a min_auction_length (which is a single network parameter for all auctions), which defines the minimum call period for an auction.

  • Any auction that would be less than min_auction_length seconds (network parameter) should not be started (e.g. if the market is nearing the end of its open period / active trading). This is to prevent auction calls that are too short given the network latency/granularity, so should be some multiple of the worst case expected block time at some confidence level, which is best maintained by governance voting (hence being a network parameter).
  • a proposal should be rejected if it would require an auction shorter min_auction_length
  • for price monitoring, etc. the auction must last for at least the min_auction_length and therefore we can avoid checking other conditions until that length is reached
  • if the parameter is changed it needs to be re-applied to any current auctions, this means that shortening it could trigger an auction ending

Opening auctions (at creation of the market)

A market that has passed the governance vote and is in Pending state will be in an auction period. The auction will never uncross while the market is in a Pending state, and only does so when it moves to another state (i.e. becomes Active, see Market Lifecycle for criteria for transition out of Pending state).

A market cannot be in multiple trading modes at the same time so if it is in an opening auction that will be the trading mode.

The enactment period of the governance proposal refers to the time between the proposal being accepted and active trading commencing, therefore inclusive of the Pending state of the market (see market lifecycle spec). A governance network parameter will set the minimum allowable enactment period for new market proposals.

Frequent batch auction

The frequent batch auction mode is a trading mode in perpetual auction, meaning that all uncrossing on the book is done at the end of auction period, then once this is done, and trades happen, a new auction period is started, and this continues forever until the market close.

e.g: auctions could be set to last 10 minutes, then every 10 minutes the book would uncross, potentially generating trades.

Note that FBAs will still have an opening auction (which must have a duration equal to or greater than the minimum batch auction duration, as well as meeting the minimum opening auction duration. Price monitoring will be able to override the trading mode and push the market into longer auctions to resolve the triggering event.

Duration of frequent batch auctions

As part of the market framework, we need to be able to specify the duration of auctions period. This should be added as a new network setting to the trading modes, and can be changed through governance. We can also imagine that an auction period could come to an end once a give number of orders have been placed on the system.

Volume maximising prices

Once the auction period finishes, vega needs to figure out the best price for the order range in the book which can be uncrossed. The first stage in this is to calculate the Volume Maximising Price Range - the range of prices (which will be a contiguous range in an unconstrained order book) at which the highest total quantity of trades can occur.

For including AMM configurations in the calculation of expected uncrossing price of the auction process and volume maximising price range, create two lists of independent copies of all currently active vAMMs. Ensure that the price range under consideration (lowest ask - highest bid) is expanded to cover the current best bid/ask prices of all vAMMs. Separately, calculate a price step size defined by either the smallest tick size or, if this would result in more steps between lowest ask and highest bid than allowed by market.liquidity.maxAmmCalculationLevels instead divide the price range into market.liquidity.maxAmmCalculationLevels and calculate the price step required for this. Additionally, add all price bounds for vAMMs which are within the auction bounds to the checked levels. Then iterate through these price levels, moving the vAMMs to each by querying their volume between the two bounds and counting this as a single trade at the price farther from mid. Add these volumes to those of individual limit orders when calculating the uncrossing price. vAMMs may quote on both sides of the book as long as they are not in reduce-only mode. When actually uncrossing the market, vAMMs should act as normal when trades from one side are being sent in to matching.

Initially we will use the mid price within this range. For example, if the volume maximising range is 98-102, we would price all trades in the uncrossing at 100 ((minimum price of range+maximum price of range)/2). In future there will be other options, which will be selectable via a network parameter specified at market creation, and changeable through governance. These other options are not yet specified.

APIs related to auctions

New APIs

These new APIs need to expose data, some of which will be re-calculated each time the state of the book changes and will expose information about the market in auction mode:

  • how long the market has been in auction mode
  • when does the next auction period start
  • how long is a period
  • the indicative uncrossing price
  • indicative uncrossing volume

The Indicative Uncrossing Price is the price at which all trades would occur if we uncrossed the order book now. This will need to be streamed like a normal price, but API users will need a way to know it's an indicative uncrossing price and not a last traded or mid price. This will likely be a new field.

Existing APIs

Unlike in traditional centralised trading venues, we will continue to calculate and emit Market Depth events which will contain the shape of the entire book, as it normally does during continuous trading. This is because the orders are already public, and calculating the Market Depth based on already-available orders would be trivial.

Restriction on orders in auction mode

Market orders are not permitted while a market is in auction mode.

Pegged orders are accepted but are immediately parked and do not enter the live order book.

Good for normal trading (GFN) orders are rejected during an auction.

Upon entering auction mode

  • Pegged orders get parked (see pegged orders spec for details).
  • Limit orders stay on the book (unless they have a TIF:GFN only good for normal trading, in this case they get removed from the book and have their status set to cancelled).
  • Cannot accept non-persistent orders (Fill Or Kill and Immediate Or Cancel)
  • Any auction that would be less than (network parameter) min_auction_length seconds should not be started.

Upon exiting auction mode

  • Pegged orders get reinstated in the order book they were originally submitted in.
  • Limit orders stay on the book (unless they have a TIF:GFA only good for auction, in this case they are removed from the book and have their status set to cancelled).

Exiting the auction mode

Auction periods may be ended with an uncrossing and the creation of any resulting trades due to:

  • the auction call period end time being reached (if such a time is set); or
  • other functionality (related to the type of auction period) that triggers the end of auction.

Auction periods do not end if the resulting state would immediately cause another auction to occur. Instead the current auction gets extended.

Ending when a market is going to enter Trading Terminated status

If the auction period specifies an end time and the market is about to transition to the "Trading Terminated" status before the auction end time or conditions are reached, then the auction must uncross immediately before the transition occurs, and the market would not in this case transition back to its normal trading mode.

Ending an auction due to functional triggers

Functionality that either triggers the end of an auction or delays the auction ending until conditions are met, even if the end time is otherwise met is defined in the relevant specs that detail the various period types that use auctions, and how their entry/exit is triggered:

First/Naive implementation

As a first version we expect:

  • A market in continuous trading mode, to be configured so it can start with an auction for a given period of time, then switch to continuous trading for the rest of the life of the market.
  • A market to be configured to run in frequent batch auction mode, which could not be changed to a continuous trading later on.

Network Parameters

min_auction_length: any auction that would be less than min_auction_length seconds (network parameter) should not be started.

Pseudo-code / Examples

Possible changes for the TradingMode configuration.

enum PricingAlgorithm {
	VolumeAveragePrice = 1,
	// etc ...
}

message AuctionConfig {
	int64 callPeriodDuration = 1;
	PricingAlgorithm algo = 2;
}

message ContinuousTrading {
  bool hasOpeningAuction = 1;
  AuctionConfig config = 2;
}

message FrequentBatchAuction {
	AuctionConfig config = 1;
}

message Market {
  // common market fields
  oneof tradingMode {
    ContinuousTrading continuous = 100;
    FrequentBatchAuction auctions = 101;
  }
}

Acceptance Criteria

  • The duration of the auction period (time between close of voting and enactment time) at market creation cannot be below the minimum auction period defined within the network (0026-AUCT-003). For product spot: (0026-AUCT-023)

  • As the Vega network, in auction mode, all orders are placed in the book but never uncross until the end of the auction period. (0026-AUCT-004). For product spot: (0026-AUCT-024)

  • As a user, I can get information about the trading mode of the market (through the market framework) (0026-AUCT-005). For product spot:(0026-AUCT-025)

  • As a user, I can get information through the API about a market in auction mode: indicative uncrossing price, indicative uncrossing volume. (0026-AUCT-006). For product spot: (0026-AUCT-026)

  • As a user, the market depth API provides the same data that would be sent during continuous trading (0026-AUCT-007). For product spot: (0026-AUCT-027)

  • As an API user, I can identify: (0026-AUCT-008). For product spot: (0026-AUCT-028)

    • If a market is temporarily in an auction period
    • Why it is in that period (e.g. Auction at open, liquidity sourcing, price monitoring)
    • When the auction will next attempt to uncross or if the auction period ended and the auction cannot be resolved for whatever reason then this should come blank or otherwise indicating that the system doesn't know when the auction ought to end.

  • A market with default trading mode "continuous trading" will start with an opening auction. The opening auction will run from the close of voting on the market proposal (assumed to pass successfully) until:

    1. the enactment time assuming there are orders crossing on the book, there is no need for the supplied liquidity to exceed a threshold to exit an auction. (0026-AUCT-038). For product spot, the enactment time assuming there are orders crossing on the book, there is no need for the supplied liquidity to exceed a threshold to exit an auction: (0026-AUCT-029)
    2. past the enactment time if there is no liquidity supplied. The auction won't end until sufficient liquidity is committed. (0026-AUCT-018)
    3. past the enactment time if liquidity is supplied but the uncrossing volume will create open interest that is larger than what the supplied stake can support. It will only end if
      • more liquidity is committed (0026-AUCT-019)
      • or if orders are cancelled such that the uncrossing volume will create open interest sufficiently small so that the original stake can support it. (0026-AUCT-020)
    4. past the enactment time if there are orders crossing on the book (there is no need for the supplied liquidity to exceed a threshold to exit an auction) but after the auction uncrossing we will not have

  • When entering an auction, all GFN orders will be cancelled. (0026-AUCT-015). For product spot: (0026-AUCT-031)

  • When leaving an auction, all GFA orders will be cancelled. (0026-AUCT-016). For product spot: (0026-AUCT-032)

  • Leaving an auction on a market with one active vAMM and some volume of crossing limit orders (bids where the vAMM would sell or sells where the vAMM would buy) results in these orders trading with the vAMM and an un-crossed order book afterwards. (0026-AUCT-033)

  • Leaving an auction on a market with three active vAMMs with differing implied fair prices results in the vAMMs trading with each other and an un-crossed order book afterwards (all vAMMs either have the same fair price or are at one extreme of their range). (0026-AUCT-034)

  • Leaving an auction with three active vAMMs whose ranges do not overlap at all results in the vAMMs trading with each other and at least two of them hitting their position limits. (0026-AUCT-035)

  • Leaving an auction with two active vAMMs with differing implied fair prices but with overlapping ranges, and a buy order at a price within both of their upper ranges (such that they would both be short) with a volume greater than the combined short position of the vAMMs at that price, results in an uncrossed market with the remaining buy order's price as the best bid after trading with the vAMMs to move their fair prices to this price. (0026-AUCT-036)

  • Leaving an auction with two active vAMMs with differing implied fair prices but with overlapping ranges, and a sell order at a price within both of their lower ranges (such that they would both be long) with a volume greater than the combined long position of the vAMMs at that price, results in an uncrossed market with the remaining sell order's price as the best ask after trading with the vAMMs to move their fair prices to this price. (0026-AUCT-037)