A forthcoming paper by Markus Baldauf and Joshua Mollner considers two designs to reduce the costs of (and incentives for) very high frequency trading. One is frequent batch auctions (on also which see Budish et al.), and the other is allowing market participants to cancel bids or asks while imposing a delay on acceptances of those bids or asks, so that spreads will not have to be widened to defend against faster traders.
High-Frequency Trading and Market Performance
Journal of Finance, Forthcoming
Last revised: 25 Jan 2020
Markus Baldauf
University of British Columbia (UBC) - Division of Finance
and
Joshua Mollner
Northwestern University - Kellogg School of Management
Abstract
We study the consequences of high-frequency trading (HFT) — and potential policy responses — via the tradeoff between liquidity and information production. Faster speeds facilitate HFT with consequences for this tradeoff: information production diminishes because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book (LOB) with either of two alternative mechanisms: delaying all orders except cancellations or frequent batch auctions.
High-Frequency Trading and Market Performance
Journal of Finance, Forthcoming
Last revised: 25 Jan 2020
Markus Baldauf
University of British Columbia (UBC) - Division of Finance
and
Joshua Mollner
Northwestern University - Kellogg School of Management
Abstract
We study the consequences of high-frequency trading (HFT) — and potential policy responses — via the tradeoff between liquidity and information production. Faster speeds facilitate HFT with consequences for this tradeoff: information production diminishes because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid-ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book (LOB) with either of two alternative mechanisms: delaying all orders except cancellations or frequent batch auctions.
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