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 auctions: uniform price double auctions conducted, for example, every tenth of a second. That is, time should be treated as discrete instead of continuous, and orders should be processed in a batch auction instead of serially. Our argument has three parts. First, we use millisecond-level direct-feed data from exchanges to document a series of stylized facts about how the continuous market works at high-frequency time horizons: (i) correlations completely break down; which (ii) leads…

• NS
  National Science Foundation

  Award: 1216083
• UO
  University of Chicago
• BS
  Booth School of Business, University of Chicago