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Toward a fully continuous exchange

Author

Listed:
  • Albert S Kyle
  • Jeongmin Lee

Abstract

We propose a new market design for a securities exchange that matches ‘continuous scaled limit orders’. This new order type differs from standard limit orders in two ways. First, orders to buy and sell represent flows of shares over time rather than stocks of shares available for immediate purchase or sale. Second, orders are expressed as continuous piecewise linear functions relating price to quantity rather than step functions defined on a discrete grid of prices and quantities. Continuous scaled limit orders implement Fischer Black’s vision of traders limiting temporary price impact by trading gradually over time. They dramatically lessen the rents high-frequency traders earn from the current market design. The proposal is compatible with frequent batch auctions and random time delays.

Suggested Citation

  • Albert S Kyle & Jeongmin Lee, 2017. "Toward a fully continuous exchange," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(4), pages 650-675.
    • Handle: RePEc:oup:oxford:v:33:y:2017:i:4:p:650-675.
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    File URL: http://hdl.handle.net/10.1093/oxrep/grx042
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    Citations

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    Cited by:

    1. Li, Sida & Wang, Xin & Ye, Mao, 2021. "Who provides liquidity, and when?," Journal of Financial Economics, Elsevier, vol. 141(3), pages 968-980.
    2. Haas, Marlene & Khapko, Mariana & Zoican, Marius, 2021. "Speed and learning in high-frequency auctions," Journal of Financial Markets, Elsevier, vol. 54(C).
    3. Brolley, Michael & Zoican, Marius, 2023. "Liquid speed: A micro-burst fee for low-latency exchanges," Journal of Financial Markets, Elsevier, vol. 64(C).
    4. Khapko, Mariana & Zoican, Marius, 2021. "Do speed bumps curb low-latency investment? Evidence from a laboratory market," Journal of Financial Markets, Elsevier, vol. 55(C).
    5. Aldrich, Eric M. & Friedman, Daniel, 2017. "Order protection through delayed messaging," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-502, WZB Berlin Social Science Center.
    6. Ferri, Giovanni & Ploner, Matteo & Rizzolli, Matteo, 2021. "Trading fast and slow: The role of deliberation in experimental financial markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    7. Marszk, Adam & Lechman, Ewa, 2021. "Reshaping financial systems: The role of ICT in the diffusion of financial innovations – Recent evidence from European countries," Technological Forecasting and Social Change, Elsevier, vol. 167(C).

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