On the Effects of Continuous Trading

29 Pages Posted: 1 Dec 2020 Last revised: 4 Mar 2021

See all articles by Ivan Indriawan

Ivan Indriawan

Auckland University of Technology - Department of Finance

Roberto Pascual

Universidad de las Islas Baleares

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: October 7, 2020

Abstract

The continuous limit order book, in which messages are processed one by one in the order of receipt, is a prominent design feature of modern securities markets. Theoretical models show that this design imposes a cost on liquidity providers and suggest that this cost may be reduced by switching to batch auctions. We examine a recent opposite move, whereby a stock exchange switches from batch auctions to continuous trading. Consistent with theoretical predictions, we find that the move leads to greater adverse selection. Trading costs increase as a result, while displayed liquidity deteriorates.

Keywords: liquidity, adverse selection, continuous trading, batch auctions

JEL Classification: G14, G15

Suggested Citation

Indriawan, Ivan and Pascual Gascó, Roberto and Shkilko, Andriy, On the Effects of Continuous Trading (October 7, 2020). Available at SSRN: https://ssrn.com/abstract=3707154 or http://dx.doi.org/10.2139/ssrn.3707154

Ivan Indriawan

Auckland University of Technology - Department of Finance ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

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