Order Protection through Delayed Messaging

47 Pages Posted: 15 Jul 2017 Last revised: 22 Jul 2018

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: July 11, 2018

Abstract

Several financial exchanges recently introduced messaging delays (e.g., the 350 microsecond delay at 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 features a discrete price grid and pegged orders, and is solved in closed form. It shows how messaging delay can indeed lower transactions costs but typically increases queuing costs. Some of the model’s many comparative static predictions are testable in the field and others are testable in a laboratory environment.

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

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

Suggested Citation

Aldrich, Eric Mark and Friedman, Daniel, Order Protection through Delayed Messaging (July 11, 2018). 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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