Order Protection through Delayed Messaging

59 Pages Posted: 15 Jul 2017 Last revised: 5 Mar 2019

See all articles by Eric M. Aldrich

Eric M. Aldrich

University of California, Santa Cruz

Daniel Friedman

University of California, Santa Cruz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 3, 2019

Abstract

Several financial exchanges recently introduced messaging delays (e.g. IEX and NYSE American) to protect ordinary investors from high-frequency traders who exploit stale orders. To capture the impact of such delays, we propose a simple parametric model of the continuous double auction market format. The model shows how messaging delays can lower transactions costs but typically increase queuing costs. Recently available field data support two key predictions: the distribution of queued pegged orders is highly leptokurtotic (discrete Laplace), and opportunities to profit from dynamic choice of pegged vs market orders are small and fleeting.

Keywords: Market design, high-frequency trading, continuous double auction, IEX

JEL Classification: C91, D44, D47, D53, G12, G14

Suggested Citation

Aldrich, Eric Mark and Friedman, Daniel, Order Protection through Delayed Messaging (March 3, 2019). Available at SSRN: https://ssrn.com/abstract=2999059 or http://dx.doi.org/10.2139/ssrn.2999059

Eric Mark Aldrich (Contact Author)

University of California, Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-4247 (Phone)

HOME PAGE: http://ealdrich.com

Daniel Friedman

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-4981 (Phone)
831-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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