Fuzzy logic-based bidding strategies in dynamic double auctions

Abstract

Purpose

Double auctions are widely used market mechanisms on the world. Communication technologies such as internet increased importance of this market institution. The purpose of this study is to develop novel bidding strategies for dynamic double auction markets, explain price formation through interactions of buyers and sellers in decentralized fashion and compare macro market outputs of different micro bidding strategies.

Design/methodology/approach

In this study, two novel bidding strategies based on fuzzy logic are presented. Also, four new bidding strategies based on price targeting are introduced for the aim of comparison. The proposed bidding strategies are based on agent-based computational economics approach. The authors performed multi-agent simulations of double auction market for each suggested bidding strategy. For the aim of comparison, the zero intelligence strategy is also used in the simulation study. Various market outputs are obtained from these simulations. These outputs are market efficiencies, price means, price standard deviations, profits of sellers and buyers, transaction quantities, profit dispersions and Smith’s alpha statistics. All outputs are also compared to each other using t-tests and kernel density plots.

Findings

The results show that fuzzy logic-based bidding strategies are superior to price targeting strategies and the zero intelligence strategy. The authors also find that only small number of inputs such as the best bid, the best ask, reference price and trader valuations are sufficient to take right action and to attain higher efficiency in a fuzzy logic-based bidding strategy.

Originality/value

This paper presents novel bidding strategies for dynamic double auction markets. New bidding strategies based on fuzzy logic inference systems are developed, and their superior performances are shown. These strategies can be easily used in market-based control and automated bidding systems.

Citation

Unal, B. and Aladag, Ç.H. (2019), "Fuzzy logic-based bidding strategies in dynamic double auctions", Kybernetes, Vol. 48 No. 3, pp. 612-635. https://doi.org/10.1108/K-01-2018-0040