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Order Protection through Delayed Messaging

43 Pages Posted: 15 Jul 2017 Last revised: 24 Nov 2017

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: November 22, 2017

Abstract

Several financial exchanges have recently introduced messaging delays (e.g., a 350 microsecond delay at IEX and NYSE American) intended to protect ordinary investors from high-frequency traders who exploit stale orders. We propose an equilibrium model of this exchange design as a modification of the standard continuous double auction market format. The model predicts that a messaging delay will generally improve price efficiency and lower transactions cost but will increase queuing costs. Some of the predictions are testable in the field or in a laboratory environment.

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

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

Suggested Citation

Aldrich, Eric M. and Friedman, Daniel, Order Protection through Delayed Messaging (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=2999059

Eric 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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