Executive Research Summary – Market Auction Integrity Theory (MAIT)

Author and inventor: Dejan Shabacker, copyright 2025. All rights reserved.

1. Conceptual Introduction

Market Auction Integrity Theory (MAIT), developed by Dejan Shabacker, provides a fundamentally new lens for understanding continuous double-auction markets. Unlike traditional financial frameworks that treat price change as the outcome of stochastic processes or aggregated expectations, MAIT asserts that price is the residual product of negotiation quality.

The central claim is that a market’s ability to produce a representative price is not constant. It fluctuates, sometimes dramatically because participants do not always behave symmetrically, rationally, or simultaneously. MAIT continuously assesses the auction’s structural soundness, determining whether prices are set through balanced, logical negotiation or result from a flawed or malfunctioning process.

This represents a conceptual leap comparable to the transition from pre-Black–Scholes heuristics to option-pricing theory:

  • Black–Scholes isolated risk-neutral valuation.
  • MAIT isolates auctional validity.

2. The Core Proposition of MAIT

The core principle behind MAIT is simple:

A market price is only meaningful to the extent that it emerges from a functional auction in which rational buyers and rational sellers are simultaneously present.

When one side withdraws — due to stress, informational imbalance, irrational intervention, urgency, agenda-driven flow, or reflexive behavior — the auction becomes structurally impaired. Prices generated under such impaired conditions are not representative of collective value.

MAIT provides a systematic method to:

  1. Detect when this impairment occurs.
  2. Quantify the degree of impairment.
  3. Identify when rational structure returns.

Once negotiation integrity is reestablished, anticipate which way prices will move to return to their typical levels.

This is why MAIT is uniquely suited to reveal:

  • hidden agendas
  • informed trading
  • reflexive breakpoints
  • manipulation signatures
  • asymmetric stress conditions
  • situations were market price deviates from rational equilibrium

3. The Structural Asymmetry MAIT Captures

Continuous markets contain two non-symmetric rational agents:

  1. The rational seller, who prefers to sell as high as possible, and only when the auction structure is intact.
  2. The rational buyer, who prefers to buy as low as possible, and only when the auction structure is intact.

When the auction becomes dysfunctional, both agents withdraw. This withdrawal creates a vacuum that allows irrational or urgent actors to dictate price. MAIT captures exactly how far the prevailing market price has drifted from the price that rational actors would have set had the auction been functional.

This makes MAIT fundamentally different from:

  • statistical mean reversion models
  • volatility estimators
  • order-book imbalance indicators
  • volume-profile tools
  • microstructure signals

MAIT does not measure behavioral noise. It measures the loss of negotiation integrity.

4. The Two Regimes of Price Formation

4.1 The Functional Regime

A functional regime exists when:

  • both rational buyers and sellers are active,
  • price discovery occurs symmetrically,
  • both parties assess every price level,
  • order flow stabilizes around a representative equilibrium.

The resulting price is structurally legitimate.

4.2 The Dysfunctional Regime

A dysfunctional regime exists when:

  • one side withdraws from the auction,
  • urgency or irrationality dominates order flow,
  • price moves without negotiation,
  • no genuine test occurs at intermediate levels.

The resulting price is structurally invalid.

MAIT’s fundamental value is that it identifies the exact moment when the regime shifts from dysfunctional to functional — the moment where rational participants re-enter the market.

This is Shabacker’s unique contribution.

5. The Philosophical Insight Behind MAIT

The philosophical core of MAIT is the recognition that price is a behavioral object, not a purely numerical one. A purely numerical model (e.g., diffusion processes, equilibrium pricing, classical microstructure) assumes that all prices are equally informative. MAIT rejects this assumption. Instead: A price observed under dysfunctional auction conditions does not contain information normally embedded in a market price.

As a result, it requires a different approach.

This means:

  • the entire distribution of future outcomes differs,
  • trading signals invert during dysfunction,
  • risk and reward asymmetries emerge naturally,
  • reflexive behavior becomes detectable and quantifiable.

This is why MAIT is a market-truth detector:

It separates “price as noise” from “price as negotiated value.”

6. MAIT as a Framework for Reflexivity

George Soros’ reflexivity theory describes how biased perceptions can reinforce price movements. MAIT operationalizes this concept quantitatively by showing:

When the auction loses integrity, price becomes reflexive.

Once integrity is reestablished, prices tend to return to their natural balance.

This is the clearest demonstration of reflexivity ever formalized:

  • Dysfunction drives price away from equilibrium.
  • Restoration of structure pulls price back.
  • MAIT identifies both turning points.

MAIT therefore provides the missing operational tool that reflexivity theory has lacked for decades.

7. The Importance of the TDF Point

The TDF Point (Transition from Dysfunction to Function) also formulated by Dejan Shabacker — is the most actionable component of the theory. It marks the instant when:

  1. negotiation legitimacy returns,
  2. rational participants re-enter,
  3. price is no longer determined by urgent needs or impulsive decisions,
  4. the auction regains its representational capacity.

At this moment, market behavior flips from:

  • forced, unidirectional motion

to

  • bidirectional negotiation.

The TDF point is where the strongest and most reliable edges in the market occur, because: Rational actors return to enforce the price levels they would have set had the auction never broken. In other words: MAIT identifies the exact moment when price must adjust.

8. MAIT as a Hedging Philosophy

Shabacker’s most innovative extension is the idea that MAIT can replace Delta with hedging applications. Not because MAIT measures price sensitivity — but because it measures auction integrity, which governs the very mechanism through which price changes occur. Thus:

  • Delta measures sensitivity within a functional market.
  • MAIT measures whether the market is functional at all.

A MAIT-based hedge becomes a pseudo-gamma engine that adjusts exposures not to price motion, but to auction quality. This has two profound consequences:

  1. It increases trading intensity where opportunity is greatest.
  2. It prevents hedging where price motion is structurally invalid and likely to revert.

The result:

More efficient exposure, better risk allocation, reduced path-dependency, and deeper interpretative clarity.

9. Significance and Novelty of Shabacker’s Contribution

MAIT represents a conceptual and methodological advancement on three levels:

1. Theoretical Novelty

MAIT introduces the first coherent framework for distinguishing validity from invalid prices in continuous markets. No prior model in microstructure, behavioral finance or quantitative modelling accomplishes this.

2. Methodological Novelty

MAIT operationalizes auction integrity as a measurable quantity, allowing its use in hedging, risk management, statistical analysis, signal generation and trading.

3. Philosophical Novelty

MAIT redefines what a price is by reconnecting it to negotiation structure rather than numerical output. This makes Shabacker’s MAIT a uniquely powerful conceptual instrument:

  • It explains market behavior that other models cannot.
  • It captures reflexivity in an operational way.
  • It makes visible phenomena that previously appeared random.
  • It unifies behavioral, structural, and quantitative analysis.
  • It produces actionable signals with clear theoretical justification.

It is intellectually consistent, empirically observable, and operationally exploitable — a rare combination in market theory.

10. Concluding Summary

The Market Auction Integrity Theory (MAIT), created by Dejan Shabacker, offers an entirely new perspective on how financial markets operate. It defines price not as a stochastic outcome, but as the output of a negotiation process whose integrity can fluctuate. By distinguishing functionality from dysfunctional auctions, MAIT reveals:

  • when price is real,
  • when price is false,
  • when reflexivity dominates,
  • when rational actors withdraw or return,
  • when price must mean-revert,
  • particularly when the edges demonstrate maximum strength and reliability.

MAIT is therefore not simply a model: It is a philosophy of market truth, a diagnostic of structural legitimacy, and a practical engine for trading, hedging and interpretation. A significant theoretical innovation. A powerful operational tool. And a research contribution of enduring value.