Order Protection Through Delayed Messaging

Several financial exchanges (e.g., IEX and NYSE American) recently introduced messaging delays to protect ordinary investors from high-frequency traders who exploit stale orders. To capture the impact of such delays, we propose a simple parametric model of the continuous double auction market format. The model examines the dynamics of midpoint pegged order queues and finds their steady states. It shows how messaging delays can protect pegged orders and improve investor welfare, but typically increase queuing costs. Recently available field data show that the empirical distribution of queued pegged orders is highly leptokurtotic and resembles the discrete Laplace distribution predicted by the model.