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On Market Design and Latency Arbitrage

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  • Wolfgang Kuhle

Abstract

We argue that contemporary stock market designs are, due to traders' inability to fully express their preferences over the execution times of their orders, prone to latency arbitrage. In turn, we propose a new order type which allows traders to specify the time at which their orders are executed after reaching the exchange. Using this order type, traders can synchronize order executions across different exchanges, such that high-frequency traders, even if they operate at the speed of light, can no-longer engage in latency arbitrage.

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  • Wolfgang Kuhle, 2021. "On Market Design and Latency Arbitrage," Papers 2202.00127, arXiv.org.
    • Handle: RePEc:arx:papers:2202.00127
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    References listed on IDEAS

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    1. Roth, Alvin E & Xing, Xiaolin, 1994. "Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions," American Economic Review, American Economic Association, vol. 84(4), pages 992-1044, September.
    2. Matteo Aquilina & Eric Budish, 2020. "Quantifying the High-Frequency Trading “Arms Race†: A Simple New Methodology and Estimates," Working Papers 2020-86, Becker Friedman Institute for Research In Economics.
    3. Alvin E. Roth & Axel Ockenfels, 2002. "Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet," American Economic Review, American Economic Association, vol. 92(4), pages 1093-1103, September.
    4. Eric Budish & Peter Cramton & John Shim, 2015. "Editor's Choice The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1547-1621.
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