Speed and Learning in High-Frequency Auctions
28 Pages Posted: 2 Mar 2016 Last revised: 9 Sep 2019
Date Written: September 7, 2019
Faster trading improves liquidity in frequent call auction markets, in contrast to continuous-time markets. We build a model where high-frequency traders (HFTs) engage in duels to trade on stale quotes. Frequent market clearing increases the likelihood of a single HFT arriving in any given auction, who subsequently acts as a monopolist on information. Higher trading speed increases the expected number of arbitrageurs participating in auctions, promoting price competition between snipers and improving liquidity. We find that faster trading and longer auction intervals are substitute instruments to reduce bid-ask spreads. Relative to continuous-time trading, frequent batch auctions reduce HFT informational rents.
Keywords: high-frequency trading, batch auction markets, liquidity, adverse selection
JEL Classification: D43, D47, G10, G14
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