The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

Budish, Eric; Cramton, Peter; Shim, John J.

doi:10.2139/ssrn.2388265

Cited by 208 publications

(380 citation statements)

References 42 publications

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Section: A3 Classificationsupporting

confidence: 90%

“…This is in line with what Baron, Brogaard, Hagströmer, and Kirilenko (2016) find, that it is relative speed, and not nominal speed, which drives differences in performance across HFTs: it is not being fast that allows a HFT to capture trading opportunities but being the fastest. This is also in line with the theoretical literature on HFTs: Biais, Foucault, and Moinas (2015), Budish, Cramton, and Shim (2015), and Menkveld and Zoican (2015).We also divide all traders into four groups based on their inventory for each stock-day: LARGE, MEDIUM, SMALL, and NOTRADE. Inventory at the end of the day is calculated by the absolute value of the number of shares bought minus the number of shares sold during the day, as a fraction of the total volume of shares bought and sold in the day for that particular stock.…”

supporting

confidence: 67%

“…Their greater speed allows HFTs to react more quickly to public news than other traders (as in theoretical research by Cespa and Foucault (2011), Pagnotta and Philippon (2011), Aït-Sahalia and Saglam (2014), Jovanovic and Menkveld (2015), Budish, Cramton, and Shim (2015), Biais, Foucault, and Moinas (2015) and Foucault, Hombert, and Roşu (2016)). The body of empirical studies on HFT trading activities is growing rapidly.…”

Section: Literature Reviewmentioning

confidence: 99%

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Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods

Bellia¹,

Pelizzon²,

Subrahmanyam³

et al. 2017

SSRN Journal

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We study whether the presence of low-latency traders (including high-frequency traders (HFTs)) in the pre-opening period contributes to market quality, defined by price discovery and liquidity provision, in the opening auction. We use a unique dataset from the Tokyo Stock Exchange (TSE) based on server-IDs and find that HFTs dynamically alter their presence in different stocks and on different days. In spite of the lack of immediate execution, about one quarter of HFTs participate in the pre-opening period, and contribute significantly to market quality in the pre-opening period, the opening auction that ensues and the continuous trading period. Their contribution is largely different from that of the other HFTs during the continuous period.JEL classification: G12, G14. Key-words: High-Frequency Traders (HFTs), Pre-Opening, Opening Call Auction, Price Discovery, Liquidity provision. * Bellia and Pelizzon are with SAFE, Goethe University and Ca' Foscari University of Venice. Subrahmanyam is with Leonard N. Stern School of Business, New York University. Uno is with Waseda University and Ca' Foscari University of Venice and Yuferova is with Norwegian School of Economics (NHH). We are grateful to Jonathan Brogaard, Austin Gerig, Björn Hagströmer, Joel Hasbrouck, Frank Hatheway, Terry Hendershott, Andrei Kirilenko, Mark van Achter, anonymous high-frequency traders, and participants at the FMA European Conference 2015, the 4th International Conference on the Industrial Organization of Securities and Derivatives Markets: High Frequency Trading, the SAFE Microstructure Workshop, Goethe University, the Conference on Securities Markets Trends, Risks and Policies, CONSOB-BAFFI CAREFIN, Bocconi University, the Swiss Society for Financial Market Research SGF Conference, the Nippon Finance Association Meeting, and the CFS Conference on High Frequency Trading, for helpful suggestions. We also thank the Tokyo Stock Exchange for providing us with anonymous detailed account-level data, which formed the basis of the research reported on in this paper. This work was carried out with the generous financial support of EUROFIDAI, which we appreciate. We also thank the Research Center SAFE, funded by the State of Hessen Initiative for Research (LOEWE), for financial support. Darya Yuferova also gratefully acknowledges the Vereniging Trustfonds Erasmus Universiteit Rotterdam for supporting her research visit to NYU Stern and is also grateful to Rotterdam School of Management, Erasmus University, where some work on this paper was carried out during her PhD studies.Global equity markets have been fundamentally altered in the past decade due to vast improvements in the speed of trading and the consequent fragmentation of market activity. Among other changes, in many markets, traditional market makers have been replaced by high-frequency traders (HFTs), operating at the level of a few milliseconds or even mi- croseconds.1 This increase in trading speed allows markets to operate far beyond human capabilities, given that the average t...

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Section: A3 Classificationsupporting

confidence: 90%

supporting

confidence: 67%

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods

Bellia¹,

Pelizzon²,

Subrahmanyam³

et al. 2017

SSRN Journal

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“…Recently Budish et al (2015) proposed to reform high-frequency trading markets. They advocate to replace the continuous limit order book which causes an inefficient race in highfrequency trading with frequently held batch uniform-price double auctions.…”

Section: Resultsmentioning

confidence: 99%

Centralizing Disconnected Markets? An Irrelevance Result

Wittwer

2017

SSRN Journal

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“…Differently from our setup, the HFT literature has mostly concentrated on modeling risk neutral agents (e.g., Budish et al (2015), Hoffmann (2014), Du and Zhu (2014), Bongaerts and Van Achter (2015), Foucault et al (2015), and Menkveld and Zoican (2015); see O'Hara (2015) and Menkveld (2016) for literature surveys).…”

Section: Introductionmentioning

confidence: 99%

High Frequency Trading and Fragility

Cespa

Vives

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may No 2020 / February 2017 AbstractWe show that limited dealer participation in the market, coupled with an informational friction resulting from high frequency trading, can induce demand for liquidity to be upward sloping and strategic complementarities in traders' liquidity consumption decisions: traders demand more liquidity when the market becomes less liquid, which in turn makes the market more illiquid, fostering the initial demand hike. This can generate market instability, where an initial dearth of liquidity degenerates into a liquidity rout (as in a flash crash). While in a transparent market, liquidity is increasing in the proportion of high frequency traders, in an opaque market strategic complementarities can make liquidity U-shaped in this proportion as well as in the degree of transparency. These episodes seem to have in common the fact that illiquidity brings more illiquidity, contrary to the dynamic that in normal market conditions illiquidity, by moderating the demand for immediacy, produces a self-stabilizing effect. In a crash, in contrast, an increase in illiquidity fosters a disorderly "run for the exit," accentuating the price movement.In the paper we trace this source of fragility to the fact that modern markets' pervasive presence of automated trading hampers market participants' access to (i) trade, and (ii) quote information. That is, two frictions shape trading activity nowadays: a participation friction (not all liquidity suppliers are continuously present in the market), and an informational friction (not all traders have access to timely market information).We model these two computerized-trading related frictions in a two-period dynamic noisy rational expectations model. We consider risk-averse dealers who provide liquidity to two cohorts of risk-averse, short-term traders who receive a common endowment shock. Dealers can be "full", with a continuous market presence as stylized high frequency traders (HFTs), or only be present in the first period market. In the first round of trade both dealers' types absorb the (market) orders of the first traders' cohort. In the second trading round, only full dealers participate. Full dealers can therefore accommodate the reverting orders of the first traders' cohort, as well as those of the incoming second cohort who only observe an imperfect signal about the first period order imbalance.We show that dealers' limited market participation favors the ...

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The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

Abstract: The high-frequency trading arms race is a symptom of flawed market design. Instead of the continuous limit order book market design that is currently predominant, we argue that financial exchanges should use frequent batch

Cited by 208 publications

References 42 publications

Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods

Low-Latency Trading and Price Discovery: Evidence from the Tokyo Stock Exchange in the Pre-Opening and Opening Periods

Centralizing Disconnected Markets? An Irrelevance Result

High Frequency Trading and Fragility

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