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A Theoretical Model of the Investors Exchange

36 Pages Posted: 15 Jul 2017 Last revised: 3 Oct 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: July 8, 2017

Abstract

Investors’ Exchange LLC (IEX) is a newly approved public exchange that is designed to discourage aggressive high-frequency trading. We explain how IEX differs from traditional continuous double auction markets and present summary data on IEX transactions by trader class and order type. Our primary contribution is a simple analytic model of IEX as a constrained version of the continuous double auction. The model predicts that IEX will generally improve price efficiency and lower transactions cost while increasing delay costs. A subset of the model’s 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, A Theoretical Model of the Investors Exchange (July 8, 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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