Comparison of continuous and frequent batch auctions

• Název práce v češtině: Srovnání spojité a opakované dávkové aukce
• Název v anglickém jazyce: Comparison of continuous and frequent batch auctions
• Klíčová slova: spojitá aukce, dávková aukce, mikrostruktura trhu
• Klíčová slova anglicky: continuous double auction, batch auction, market microstructure
• Akademický rok vypsání: 2016/2017
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: RNDr. Martin Šmíd, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 11.09.2017
• Datum zadání: 13.09.2017
• Datum a čas obhajoby: 20.06.2018 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O314, Opletalova - místn. č. 314
• Datum odevzdání elektronické podoby: 10.05.2018
• Datum proběhlé obhajoby: 20.06.2018
• Oponenti: RNDr. Michal Červinka, Ph.D.

Seznam odborné literatury

Budish, E., Cramton, P., & Shim, J. (2015). The high-frequency trading arms race: Frequent batch auctions as a market design response. The Quarterly Journal of Economics, 130(4), 1547-1621.
Brons, Burlakov, Y., Kamal, M., & Salvadore, M. (2012). Optimal limit order execution in a simple model for market microstructure dynamics.
Conrad, J., Wahal, S., & Xiang, J. (2015). High-frequency quoting, trading, and the efficiency of prices. Journal of Financial Economics, 116(2), 271-291.
Gode, D. K., & Sunder, S. (1993). Allocative efficiency of markets with zero-intelligence traders: Market as a partial substitute for individual rationality. Journal of political economy, 101(1), 119-137.
LeBaron, B. (2001). A builder’s guide to agent-based financial markets. Quantitative Finance, 1(2), 254-261.
Menkveld, A. J., & Zoican, M. A. (2017). Need for speed? Exchange latency and liquidity. The Review of Financial Studies, 30(4), 1188-1228.
O’Hara, M. (2015). High frequency market microstructure. Journal of Financial Economics, 116(2), 257-270.
Rojcek, J., & Ziegler, A. (2016). High-frequency trading in limit order markets: Equilibrium impact and regulation.

Předběžná náplň práce v anglickém jazyce

Motivation
The financial markets have undergone an enormous change in the last few decades, mainly thanks to advances in computer sciences and information technologies in general. This change is generally regarded as a positive development - for instance the transaction costs have gone down significantly, making the markets accessible not only to large institutions but to retail investors as well. One of the most influential concepts is that of high frequency trading (HFT) - thanks to high- performance computers, we are now able to let computers trade, making tens of thousands of transactions per second.

HFT also became quite a controversial topic of discussion and of interest to many researchers. The proponents of HFT argue that it further helped drive down the transaction costs, as high-frequency traders usually act as market makers, replacing the inefficient human market makers and specialists, narrowing further the bid-ask spread. On the other hand HFT is usually criticized as it is associated with many black-hat methods and with some adverse events such as flash crashes. Just to name a few, high-frequency traders have been many times fined due to techniques such as quote-stuffing, front-running or spoofing. Leaving the general critique aside, HFT nowadays is almost at its limits when it comes to the physical restrictions. Light, hence information, can only travel so fast. That is why we saw immense investment into the trading infrastructure, the most famous example is that of $300m cable which decreased the time it takes the information to go from New York to Chicago by three milliseconds.

Such investment is incentivized mainly because trading today is conducted on the first-come first serve basis in a continuous fashion. Therefore only a slight time-advantage can be the difference between making and losing money as a HFT firm. Budish et al. (2015) have proposed a different mechanism - frequent batch auctions. With such model, the marginal speed difference is not as important and traders should focus more on price rather than on the speed. It is similar mechanism to how current price scale works, instead of having a continuous one different markets have different tick sizes - discrete points at which trading can take place. The logic here is that lower price differential than a tick size is economically insignificant and therefore should be ignored. Similarly marginal time differences should be ignored in the same way. In my thesis I would like to look into metrics based on which we could assess suitability of the two models for various trading environment.

Hypotheses
Hypothesis #1: Batch auctions diminish the importance of the speed of execution.
Hypothesis #2: Batch auctions are more socially optimal way of organizing the markets.
Hypothesis #3: High-frequency traders will be most influenced by the change in market structure.

Methodology
Due to the nature of our problem, agent-based model is an appropriate approach - it bypasses the need of having the data and gives us enough flexibility with the actual modeling scenarios. We will be using the zero-intelligence agents Gode et al. (1993), as these traders under given constraint approximate behavior of traders in the real markets. This way we can model the behavior of various actors e.g. liquidity traders (LT) will represent those interested in the underlying asset, high frequency traders will mainly act as market makers, making use of their low-latency between the exchanges and their servers. The model will be studied from point of view of characteristics of the market environment, be it the efficiency of price discovery, short-term liquidity or transaction costs.

Expected Contribution
Although some studies on the topic of the ideal market organization have already been published, the problem can still be tackled from many different points of view. Hence the thesis will most likely focus on a subset of conditions/market situations and study the behavior of agents under these constraints. The outcome of this thesis should then should shed some light on the particular subset and its implication towards policy making and exchange regulations.

Outline
1. Motivation - summary of proponents and critics of HTF. Literature review
2. Methodology - construction of exchanges and of the agent model.
3. Criteria - explanation of metrics based on which the models will be compared.
4. Running the simulation, summary of results
5. Concluding remarks; implications for exchange policies and regulations.