On the Effects of Continuous Trading

62 Pages Posted: 1 Dec 2020 Last revised: 29 Feb 2024

See all articles by Ivan Indriawan

Ivan Indriawan

University of Adelaide

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 is a prominent design feature of modern securities markets. Theoretical literature suggests that this feature has an undesirable property; it enables latency arbitrage, leading to adverse selection and higher trading costs. As an alternative, the literature recommends switching to frequent batch auctions. We empirically examine the opposite scenario -- an exchange switching from auctions to continuous trading. Consistent with theory, adverse selection increases significantly. Notably, realized spreads decrease, an effect that has not been modeled. The interplay between adverse selection and realized spreads varies in the cross-section, with adverse effects concentrating in frequently-traded stocks.

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

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

HOME PAGE: http://https://sites.google.com/site/ivanindriawan/home

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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