Order Protection through Delayed Messaging

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