Trading Securities Through Periodic Auctions
A quick question for my readers who are educated in these matters: U.S. stock exchanges currently operate in "real time," meaning that within our technological tolerances they give priority to orders that come in first, other things being equal, even if the gap is only a microsecond or whatever.
What would be the consequences if we matched orders in an auction conducted every second? So here is how it would work:
11:31:0025 to 11:31:0075 (that is, between a quarter and three quarters of a second after 11:31 a.m.):
Traders submit orders, which are held in confidence (other traders can't see them).
11:31:01 (that is, a second after 11:31 a.m.):
Orders are matched according to pre-determined, publicly available rules, and a market-clearing price is set, with each trader paying or receiving the same price. The time at which each order came in is irrelevant (except that all orders must be received in the window specified above).
11:31:011
The results of the auction are published and disseminated. At this point, orders that were executed are no longer held in confidence—parties are revealed to each other so that they can settle their trades, and the price and volume of the auction are published.
11:31:0125 to 11:31:0175
Traders submit orders.
And so forth.
It's true that this would represent a huge slowing-down of the markets. But the longest you would ever have to wait for the next auction is a second, and it doesn't seem as though that is a particularly heavy burden for traders to bear. Furthermore, the auction could be conducted centrally, with each exchange forwarding its buy and sell orders to one location, so that there would be no fragmentation of the market. (I am assuming that all exchanges, wherever located, are capable of processing and transmitting information within the specified time periods, since a quarter of a second is a very long time in financial markets. If this assumption is unwarranted, then the process could be slowed down somewhat, with auctions taking place every two seconds or whatever.)
One potential problem that I see with this is that it might not facilitate complicated order types. In other words, if my instruction is simply: "buy 100 shares at any price" or "buy 100 shares at any price below $60," then a centralized auction should work. But if an exchange has set up a very elaborate order type, then the centralized auction might not be able to handle it.
Another potential problem is that traders will be motivated to get their trades in at the very end of the window, so as to take advantage of whatever information has become available since the previous auction. However, there shouldn't be new market information, since all trading is channeled to the periodic auctions. There may be real-world information during the trading window (an earthquake or something), but presumably this is not unique to the auction system. The orders may be clustered at the end of the half-second window, but I'm not sure that confers an unfair advantage on anyone.
What would be the consequences if we matched orders in an auction conducted every second? So here is how it would work:
11:31:0025 to 11:31:0075 (that is, between a quarter and three quarters of a second after 11:31 a.m.):
Traders submit orders, which are held in confidence (other traders can't see them).
11:31:01 (that is, a second after 11:31 a.m.):
Orders are matched according to pre-determined, publicly available rules, and a market-clearing price is set, with each trader paying or receiving the same price. The time at which each order came in is irrelevant (except that all orders must be received in the window specified above).
11:31:011
The results of the auction are published and disseminated. At this point, orders that were executed are no longer held in confidence—parties are revealed to each other so that they can settle their trades, and the price and volume of the auction are published.
11:31:0125 to 11:31:0175
Traders submit orders.
And so forth.
It's true that this would represent a huge slowing-down of the markets. But the longest you would ever have to wait for the next auction is a second, and it doesn't seem as though that is a particularly heavy burden for traders to bear. Furthermore, the auction could be conducted centrally, with each exchange forwarding its buy and sell orders to one location, so that there would be no fragmentation of the market. (I am assuming that all exchanges, wherever located, are capable of processing and transmitting information within the specified time periods, since a quarter of a second is a very long time in financial markets. If this assumption is unwarranted, then the process could be slowed down somewhat, with auctions taking place every two seconds or whatever.)
One potential problem that I see with this is that it might not facilitate complicated order types. In other words, if my instruction is simply: "buy 100 shares at any price" or "buy 100 shares at any price below $60," then a centralized auction should work. But if an exchange has set up a very elaborate order type, then the centralized auction might not be able to handle it.
Another potential problem is that traders will be motivated to get their trades in at the very end of the window, so as to take advantage of whatever information has become available since the previous auction. However, there shouldn't be new market information, since all trading is channeled to the periodic auctions. There may be real-world information during the trading window (an earthquake or something), but presumably this is not unique to the auction system. The orders may be clustered at the end of the half-second window, but I'm not sure that confers an unfair advantage on anyone.
posted by James | 12:35 PM
1 Comments:
I think that is a pretty interesting idea
Post a Comment
<< Home