Speed and Learning in High-Frequency Auctions
32 Pages Posted: 2 Mar 2016 Last revised: 3 Jun 2021
Date Written: April 26, 2020
Abstract
Faster trading improves liquidity in periodic call auction markets, in contrast to continuous-time
markets. We build a model where high-frequency traders (HFTs) engage in duels to trade on
stale quotes. More frequent periodic auctions increase the likelihood that a single HFT arrives in
any given auction and subsequently acts as a monopolist on information. Higher trading speed
increases the expected number of arbitrageurs participating in auctions, promoting competition
between snipers and improving liquidity. We find that faster trading and longer auction intervals
are substitute instruments to reduce bid-ask spreads. Relative to continuous-time trading,
periodic batch auctions reduce HFT informational rents.
Keywords: high-frequency trading, batch auction markets, liquidity, adverse selection
JEL Classification: D43, D47, G10, G14
Suggested Citation: Suggested Citation