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Welfare and Optimal Trading Frequency in Dynamic Double Auctions

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  • Songzi Du
  • Haoxiang Zhu

Abstract

This paper studies the welfare consequence of increasing trading speed in financial markets. We build and solve a dynamic trading model, in which traders receive private information of asset value over time and trade strategically with demand schedules in a sequence of double auctions. A stationary linear equilibrium and its efficiency properties are characterized explicitly in closed form. Infrequent trading (few double auctions per unit of time) leads to a larger market depth in each trading period, but frequent trading allows more immediate asset re-allocation after new information arrives. Under natural conditions, the socially optimal trading frequency coincides with information arrival frequency for scheduled information releases, but can (far) exceed information arrival frequency for stochastic information arrivals. If traders have heterogeneous trading speeds, fast traders prefer the highest feasible trading frequency, whereas slow traders tend to prefer a strictly lower frequency.

Suggested Citation

  • Songzi Du & Haoxiang Zhu, 2014. "Welfare and Optimal Trading Frequency in Dynamic Double Auctions," NBER Working Papers 20588, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20588
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    References listed on IDEAS

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    1. Johannes Hörner & Stefano Lovo, 2009. "Belief-Free Equilibria in Games With Incomplete Information," Econometrica, Econometric Society, vol. 77(2), pages 453-487, March.
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    7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
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    10. Motty Perry & Philip J. Reny, 2005. "An Efficient Multi-Unit Ascending Auction," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 567-592.
    11. Hoffmann, Peter, 2014. "A dynamic limit order market with fast and slow traders," Journal of Financial Economics, Elsevier, vol. 113(1), pages 156-169.
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    Cited by:

    1. Giovanni Cespa & Xavier Vives, 2016. "High Frequency Trading and Fragility," CESifo Working Paper Series 6279, CESifo Group Munich.
    2. Albert S Kyle & Anna A Obizhaeva & Yajun Wang, 2018. "Smooth Trading with Overconfidence and Market Power," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 611-662.
    3. Marlene Haas & Marius Andrei Zoican, 2016. "Beyond the Frequency Wall: Speed and Liquidity on Batch Auction Markets," Post-Print hal-01484805, HAL.
    4. Robert Shimer & Gregor Jarosch & Maryam Farboodi, 2016. "Meeting Technologies in Decentralized Asset Markets," 2016 Meeting Papers 844, Society for Economic Dynamics.
    5. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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