Speed and Learning in High-Frequency Auctions
36 Pages Posted: 2 Mar 2016 Last revised: 26 Oct 2018
Date Written: October 23, 2018
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: Suggested Citation