Toward a Fully Continuous Exchange

39 Pages Posted: 1 Mar 2017 Last revised: 18 Aug 2017

See all articles by Albert S. Kyle

Albert S. Kyle

University of Maryland

Jeongmin Lee

Washington University in St. Louis - John M. Olin Business School

Date Written: July 4, 2017

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

Suggested Citation

Kyle, Albert (Pete) S. and Lee, Jeongmin, Toward a Fully Continuous Exchange (July 4, 2017). Available at SSRN: https://ssrn.com/abstract=2924640 or http://dx.doi.org/10.2139/ssrn.2924640

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Jeongmin Lee (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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