Experiments in High-Frequency Trading: Comparing Two Market Institutions
40 Pages Posted: 4 May 2018 Last revised: 1 Mar 2019
Date Written: February 21, 2019
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: Suggested Citation