The School of Economics invites you to an Experimental Economics seminar, ‘Order Protection through Delayed Messaging’ presented by:

Daniel Friedman

(University of California, Santa Cruz)

Co-author:

Eric M. Aldrich (University of California, Santa Cruz)

Abstract:

Several financial exchanges recently introduced messaging delays (e.g., the 350 microsecond delay at IEX and NYSE American) to protect ordinary investors from high-frequency traders who exploit stale orders. To capture the impact of such delays, we propose a simple parametric model of the continuous double auction market format. The model features a discrete price grid and pegged orders, and is solved in closed form. It shows how messaging delay can indeed lower transactions costs but typically increases queuing costs. Many of the model’s comparative static predictions are testable in the lab. Recently available field data support two key predic- tions: the distribution of queued pegged orders is highly leptokurtotic (discrete Laplace), and opportunities to profit from dynamic choice of pegged vs market orders are small and fleeting.