Frequent batch auctions and informed trading

We study liquidity provision by competitive high-frequency trading firms (HFTs) in a dynamic trading model with private information. Liquidity providers face adverse selection risk from trading with privately informed in
We study liquidity provision by competitive high-frequency trading firms (HFTs) in a dynamic trading model with private information. Liquidity providers face adverse selection risk from trading with privately informed investors and from trading with other HFTs that engage in latency arbitrage upon public information. The impact of the two different sources of risk depends on the details of the market design. We determine equilibrium transaction costs in continuous limit order book (CLOB) markets and under frequent batch auctions (FBA). In the absence of informed trading, FBA dominates CLOB just as in Budish et al. (2015). Surprisingly, this result does no longer hold with privately informed investors. We show that FBA allows liquidity providers to charge markups and earn profits – even under risk neutrality and perfect competition. A slight variation of the FBA design removes the inefficiency by allowing traders to submit orders conditional on auction excess demand.
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Metadaten
Author:Steffen Eibelshäuser, Fabian Smetak
URN:urn:nbn:de:hebis:30:3-645723
URL:https://ssrn.com/abstract=4065547
DOI:http://dx.doi.org/10.2139/ssrn.4065547
Parent Title (English):SAFE working paper ; No. 344
Series (Serial Number):SAFE working paper series (344)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/04/04
Tag:continuous limit order book; frequent batch auctions; high-frequency trading; latency arbitrage; liquidity provision; market design; market microstructure; sniping
Edition:March 11, 2022
Pagenumber:62
HeBIS PPN:49344940X
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:G10 General
D47 Market Design
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht

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