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Welfare and Optimal Trading Frequency in Dynamic Double Auctions

66 Pages Posted: 16 Apr 2012 Last revised: 23 Dec 2015

Songzi Du

Simon Fraser University (SFU) - Department of Economics

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 22, 2015

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.

Keywords: trading frequency, welfare, high-frequency trading, dynamic trading, double auction

JEL Classification: D44, D82, G14

Suggested Citation

Du, Songzi and Zhu, Haoxiang, Welfare and Optimal Trading Frequency in Dynamic Double Auctions (December 22, 2015). Available at SSRN: https://ssrn.com/abstract=2040609 or http://dx.doi.org/10.2139/ssrn.2040609

Songzi Du (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.sfu.ca/~songzid

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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