On the Effects of Continuous Trading

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Andriy Shkilko

Paper Title: On the Effects of Continuous Trading (available via attachment)

Speaker: Andriy Shkilko, Wilfrid Laurier University

Time and Date: 12 – 1 pm, Wednesday 14th December 2022 (Australian Eastern Daylight Time)

Venue: Face-to-face seminar in room CB08.08.002, Level 8, Building 8, University of Technology Sydney, Australia (Map of campus)

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 witches 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.  

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