Can Stock Exchanges with 'Speed Bump' Designs Survive?
31 Pages Posted: 6 Apr 2022
Date Written: March 16, 2022
New stock exchange designs such as frequent batch auctions and order-delay designs have been proposed to slow down the trading speed and eliminate the speed arms race among high-frequency traders (HFTs). This paper investigates how newly designed exchanges with these 'speed-bump' features would compete against traditional exchanges. I find that among order-delay proposals, the most effective design is to delay only liquidity-taking orders as proposed by the Chicago Stock Exchange. Frequent batch auctions are shown not to improve liquidity when the degree of private information is high enough. Moreover, when frequent batch auctions are implemented, exchanges have incentives to compete on the frequency of batch auctions. Finally, I show that exchanges with a large market share of total trading volume may lack incentives to implement a 'speed bump' even when these innovative designs could improve long-term investor welfare. Therefore, the interests of exchanges may not be aligned with those of long-term investors with regard to how they value designs that alleviate 'sniping' by HFTs.
Keywords: Exchange Speed, High-frequency Trading, Trade-through, Order Delay
JEL Classification: D47, G10, G14, G18
Suggested Citation: Suggested Citation