On the Effects of Continuous Trading

57 Pages Posted: 1 Dec 2020 Last revised: 22 Jun 2022

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 side effect; it enables latency arbitrage, which generates adverse selection and drives up liquidity costs. As a superior alternative, the literature recommends switching to frequent batch auctions. We examine an opposite move, whereby a large modern market switches from auctions to continuous trading. Consistent with theory, adverse selection and trading costs increase significantly. Some non-arbitrage volume is lost, but the gain in arbitrage volume is greater, benefiting exchange revenue. The latter result helps explain the current dominance of the continuous design.

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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