High Frequency Fairness

39 Pages Posted: 3 Dec 2020

See all articles by Guillaume Haeringer

Guillaume Haeringer

CUNY Baruch College

Hayden Melton

LSEG (London Stock Exchange Group)

Date Written: October 20, 2020


The emergence of high frequency trading has resulted in `bursts' of orders arriving at an exchange (nearly) simultaneously, yet most electronic financial exchanges implement the continuous limit order book which requires processing of orders serially. Contrary to an assumption that appears throughout the economics literature, the technology that performs serialization provides only constrained random serial dictatorship (RSD) in the sense that not all priority orderings of agents are possible. We provide necessary and sufficient conditions for fairness under different market conditions on orders for constrained RSD mechanisms. Our results show that exchanges relying on the current serialization technology cannot ensure fairness, including exchanges using `speed bumps.' We find that specific forms of constrained RSD ensure fairness under certain assumptions about the content of those orders but that the general case nevertheless requires unconstrained RSD. Our results have implications for the design of trading exchanges.

Keywords: Electronic trading, limit order book, fairness, random serial dictatorship

JEL Classification: D71, G100, D47

Suggested Citation

Haeringer, Guillaume and Melton, Hayden, High Frequency Fairness (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3715590 or http://dx.doi.org/10.2139/ssrn.3715590

Guillaume Haeringer (Contact Author)

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

Hayden Melton

LSEG (London Stock Exchange Group) ( email )

3 Times Square
New York, NY
United States

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