Speed and Learning in High-Frequency Auctions

36 Pages Posted: 2 Mar 2016 Last revised: 26 Oct 2018

See all articles by Marlene Haas

Marlene Haas

Independent

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Marius Zoican

University of Toronto - Finance Area

Date Written: October 23, 2018

Abstract

Faster trading can improve liquidity in frequent call auction markets. In contrast, speeding up continuous-time markets increases information costs for high-frequency liquidity providers whose quotes are more exposed to snipers. We build a model showing that trading speed stimulates price competition between arbitrageurs in very frequent call auction markets with learning frictions. A higher trading speed increases the expected number of arbitrageurs participating in the auction. Consequently, each arbitrageur uses more aggressively priced orders. As a result, adverse selection costs drop and liquidity improves. While liquidity decreases in auction frequency, even very frequent auctions improve liquidity relative to continuous-time trading.

Keywords: High-frequency trading, batch auction markets, liquidity, adverse selection

JEL Classification: D43, D47, G10, G14

Suggested Citation

Haas, Marlene and Khapko, Mariana and Zoican, Marius, Speed and Learning in High-Frequency Auctions (October 23, 2018). Paris December 2016 Finance Meeting EUROFIDAI - AFFI . Available at SSRN: https://ssrn.com/abstract=2738071 or http://dx.doi.org/10.2139/ssrn.2738071

Marlene Haas

Independent

No Address Available

Mariana Khapko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

Marius Zoican (Contact Author)

University of Toronto - Finance Area ( email )

105 St George Street
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://www.mariuszoican.org

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