What is an N-Way Exchange?

N-Way, M-Way, & Aggregating Exchanges - Slick Technology with the Ability to Dramatically Increase Market Efficiency

N-way, multi-way (m-way), and aggregating exchanges are exchanges where there is a one-to-many, many-to-one, or many-to-many relationship between the counterparties on both sides of the transaction. This is in contrast to simple exchanges like e-Bay, where transactions are one-to-one, one seller, one buyer. The term "aggregating exchanges" is often used because these exchanges aggregate the buying and/or selling intent of multiple parties on each side of the transaction.

Sellers typically use n-way exchanges to sell large lots of products to multiple buyers who would be unable to buy the lots themselves individually, and to do so in a cost effective manner. For instance, a large seller, with 100,000 tons of recycled Aluminum may not be able to find a large enough buyer who can make a single buy. An n-way exchange can be an efficient way to sell in smaller lots. Buyers post their interest, this may include delivery, quality, and scheduling parameters as well pricing. The seller inputs his own criterion which will probably also include minimum purchase size and pricing so he's not hit with more small purchases than he can handle efficiently or opportunistic buy attempts. The exchange aggregates buy interest with compatible criterion on the sell side and creates a binding optimal transaction. For instance, higher price per ton and bigger lot sizes might be fulfilled first regardless of the order of input. The deals are sealed; product is shipped and payments are processed.

Buyers often use n-way exchanges to get better terms. Sellers are often willing to lower pricing on volume buys. Buyers essentially collude, without necessarily knowing each other or making specific arrangements, to get better pricing. This is often amenable to Sellers because of the higher total volumes transacted (the cost of the sale is reduced).

It's important to note that n some exchanges buyers have more power to set terms and on some exchanges sellers have that power. Who has more power on an exchange? Generally it depends on who built or owns the exchange, since they set the ground rules, and on the ratio of supply to demand. If supply is very high relative to demand (and not all from the same place), the buyers typically have an advantage. If supply is low relative to demand, then sellers have an advantage. Exchanges with high multi-channel supply and high multi-party demand are considered efficient because the exchange drives up efficiency and volume and drives down pricing. Exchanges therefore do not typically upset the balance of power in a mature industry (unless players are excluded or decline to join) but they do make the transactions more efficient.

Truly neutral exchanges are exchanges where buyers and sellers are on relatively equal footing in terms of ground rules, and the exchange itself has no more interest in one versus the other, are typically built and maintained by third parties. These typically offer a good deal of transparency; that is both sellers and buyers can monitor the state of the exchange in real or near-time, can see buys and sells, watch trends, and see history. Typically, neutral exchanges make their money in things like membership and transaction fees.

Many-to-Many transactions have multiple counterparties on each side of the transaction at completion. Many-to-Many transactions can get very complicated. However, providing there is sufficient compatible supply and demand, they allow the exchange to “jigsaw” together complicated transactions that would not be executable in a one-to-many or many-to-one scenario. Here is an example -

Two sellers (s1 and s2) have the following registered intent – s1: 200 units/min order: 200 units/all or nothing, s2: 100 units/min order: 100 units/a;; or nothing.

Three buyers (b1, b2, and b3) have the following registered intent – b1: 100 units, b2: 150 units, b3: 50 units.

Notice, the totals are compatible - 300 to sell, 300 to buy - but not the lot sizes. Neither S1 or S2 wish to split their volumes. The pieces do not fit. So, how does the exchange execute this? By providing a fulfillment service in between. The exchange in effect buys the 300 units, takes delivery, breaks the lots up and then ships direct to the buyers itself. There is usually a charge involved, which the buyers and sellers are often happy to pay because it creates a sale where there would be no sale. Why would a seller not break up his own order if the total buy size met his total volume criterion? He might and that could be handled as straight multiple one-to-many and many-to-one transactions, but often the case is that the seller cannot handle small orders or changes to inventory easily. He might not even have any dedicated staff of his own. He might just need to get arriving pallets off a lot or a dock or existing pallets out of storage as fast as possible.

Next: Computational Requirements for an N-Way Exchange