Experiments in High-Frequency Trading: Testing the Frequent Batch Auction

54 Pages Posted: 4 May 2018 Last revised: 3 Aug 2018

Eric M. Aldrich

University of California, Santa Cruz

Kristian López Vargas

University of California, Santa Cruz

Date Written: July 27, 2018

Abstract

We implement a laboratory financial market where traders can access costly technology that reduces communication latency with a remote exchange. In this environment, we conduct a market design study on high-frequency trading: we contrast the performance of the newly proposed Frequent Batch Auction (FBA) against the Continuous Double Auction (CDA), which organizes trades in most exchanges worldwide. Our evidence suggests that, relative to the CDA, the FBA exhibits (1) less predatory trading behavior, (2) lower investments in low-latency communication technology, (3) lower transaction costs, and (4) lower volatility in market spreads and liquidity. We also find that transitory shocks in the environment have substantially greater impact on market dynamics in the CDA than in the FBA.

Keywords: Market Design, Auctions, High-Frequency Trading, Continuous Double Auction, Frequent Batch Auction

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

Suggested Citation

Aldrich, Eric Mark and López Vargas, Kristian, Experiments in High-Frequency Trading: Testing the Frequent Batch Auction (July 27, 2018). Available at SSRN: https://ssrn.com/abstract=3154070 or http://dx.doi.org/10.2139/ssrn.3154070

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

Kristian López Vargas

University of California, Santa Cruz ( email )

1156 High Street
Economics
Santa Cruz, CA 95064
United States

HOME PAGE: http://kmlv.github.io/

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