HANSON’S AUTOMATED MARKET MAKER

Abstract

From Hanson’s “market scoring rule,” we derive all the necessary formulae to implement a corresponding automated market maker for a prediction market.  The market maker has many desirable qualities and always stands ready to trade, thus providing liquidity to markets.  The formulae cover all transactions for buying and selling market contracts.  In addition, we address practical concerns like how to correctly treat rounding errors and how to prevent errors that allow traders to cheat the market, and provide a practical numerical example.  We have used Hanson's automated market maker to run many markets at Microsoft.