Violations of Price-Time Priority and Implications for Market Quality

40 Pages Posted: 10 Jan 2020

See all articles by Seoyoung Kim

Seoyoung Kim

Santa Clara University

Daniel Trepanier

Santa Clara University

Date Written: December 19, 2019

Abstract

Using a proprietary dataset of a market maker’s limit orders and order acknowledgments timestamped to the nanosecond, we explore the consistency and reliability of an exchange’s price-time priority in practice. We find a high degree of variability in acknowledgment times, and we find that the proportion of times in which the first order entered is also first to be acknowledged is surprisingly low when consecutive orders are placed at very high frequencies. Furthermore, we provide suggestive evidence of impaired market quality in the form of: (i) excess messaging, and (ii) unabsorbed end-of-day order imbalance as a result.

Keywords: price/time priority; queuing uncertainty; high-frequency trading (HFT); excess messaging; order imbalance; market design; market microstructure

JEL Classification: G1; G2

Suggested Citation

Kim, Seoyoung and Trepanier, Daniel, Violations of Price-Time Priority and Implications for Market Quality (December 19, 2019). Available at SSRN: https://ssrn.com/abstract=3507106 or http://dx.doi.org/10.2139/ssrn.3507106

Seoyoung Kim (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Daniel Trepanier

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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