Order Protection through Delayed Messaging
47 Pages Posted: 15 Jul 2017 Last revised: 22 Jul 2018
Date Written: July 11, 2018
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
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