Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets

38 Pages Posted: 4 Dec 2013 Last revised: 2 Sep 2016

Daniel Fricke

University College London; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of Oxford - Said Business School

Austin Gerig

U.S. Securities and Exchange Commission

Date Written: August 31, 2016

Abstract

How fast should a security trade? To answer this question, we model the trading of a security via periodic batch auctions and study how market quality depends on the clearing frequency of the auctions. In our model, the optimal clearing frequency is determined by four factors: (1) the volatility of the security’s value; (2) the dispersion of investors’ reservation prices; (3) the intensity of trading in the security; and (4) the correlation of the security’s value with other securities. We find that for most parameter values, market quality is maximized at intermediate auction intervals, when markets are neither too fast nor too slow. Based on simulations, we demonstrate that an analogous intermediate time delay is also optimal for order placements in continuous double auction markets. Finally, using proxies of the model parameters, we estimate that the ideal clearing interval for a typical S&P 500 stock is on the order of a few seconds currently, compared with several minutes in the 1990s.

Keywords: call auctions, batch auctions, clearing frequency, high-frequency trading, latency, liquidity

JEL Classification: G14, G19

Suggested Citation

Fricke, Daniel and Gerig, Austin, Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets (August 31, 2016). Available at SSRN: https://ssrn.com/abstract=2363114 or http://dx.doi.org/10.2139/ssrn.2363114

Daniel Fricke

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Houghton St, London WC2A 2AE, United Kingdom
London

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Austin Gerig (Contact Author)

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
United States
202-551-4575 (Phone)

HOME PAGE: http://www.austingerig.com

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