Toward a Fully Continuous Exchange

Abstract

We propose continuous scaled limit orders to implement Fischer Black’s vision of financial markets. By making trading continuous in price, quantity, and time, continuous scaled limit orders eliminate rents high frequency traders earn exploiting artifacts of the current market design. By avoiding time priority, this new order type protects slow traders from being picked off by high frequency traders and makes high frequency traders compete among themselves. All traders, regardless of their technological capacity, can optimally spread trades out over time to minimize adverse price impact. Organized exchanges should move not toward more discreteness but toward a full continuity.

Keywords: Market Microstructure, Smooth Trading, Auction Design, Market Design