When Yahoo! Search director Gary Flake announced Yahoo’s new Tech Buzz Game at ETech this week, he briefly mentioned that it operates as a dynamic pari-mutual auction. According to Yahoo! a dynamic pari-mutuel market is a new (patent pending) auction mechanism, invented at Yahoo! Research Labs. The mechanism has many nice properties. The best way to understand it is in comparison to more familiar types of auctions. These include the pari-mutuel auction (often used in horse race wagering) and the continuous double auction (used in the stock market). Pari-mutuels allow anyone to buy at any time (infinite liquidity), but offer no reward to participants who know information ahead of other people. That is, pari-mutuels are inefficient at propagating information in real time. Double auctions efficiently propagate information, but often require a market maker to assume risk in order to drive liquidity.

The dynamic pari-mutuel auction, Yahoo! says, offers the best of both types of action: infinite liquidity (traders can buy or sell at any time), no requirement for a market maker to take on risk, rewards for participants with proprietary knowledge, and efficient aggregation and propagation of information. Read a Yahoo! white paper on the subject for more in-depth understanding.