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Order protection through delayed messaging

Author

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  • Aldrich, Eric M.
  • Friedman, Daniel

Abstract

Several financial exchanges have recently introduced messaging delays (e.g., a 350 microsecond delay at IEX and NYSE American) intended to protect ordinary investors from high-frequency traders who exploit stale orders. We propose an equilibrium model of this exchange design as a modification of the standard continuous double auction market format. The model predicts that a messaging delay will generally improve price efficiency and lower transactions cost but will increase queuing costs. Some of the predictions are testable in the field or in a laboratory environment.

Suggested Citation

  • 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.
    • Handle: RePEc:zbw:wzbmdn:spii2017502
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    File URL: https://www.econstor.eu/bitstream/10419/173265/1/1011069830.pdf
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    References listed on IDEAS

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    1. repec:oup:rfinst:v:30:y:2017:i:4:p:1188-1228. is not listed on IDEAS
    2. Albert J. Menkveld & Marius A. Zoican, 2017. "Need for Speed? Exchange Latency and Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1188-1228.
    3. Breckenfelder, Johannes, 2013. "Competition between high-frequency traders, and market quality," MPRA Paper 66715, University Library of Munich, Germany, revised Dec 2013.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    market design; high-frequency trading; continuous double auction; IEX; lab experiments;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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