TY  - UNPD
A1  - Eibelshäuser, Steffen
A1  - Smetak, Fabian
T1  - Frequent batch auctions and informed trading
T2  - SAFE working paper ; No. 344
N2  - 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.
T3  - SAFE working paper - 344 
KW  - market design
KW  - market microstructure
KW  - liquidity provision
KW  - high-frequency trading
KW  - continuous limit order book
KW  - frequent batch auctions
KW  - sniping
KW  - latency arbitrage
Y1  - 2022
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/64572
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-645723
UR  - https://ssrn.com/abstract=4065547
PB  - SAFE
CY  - Frankfurt am Main
ER  -