Using laboratory experiments, we compare two leading financial market formats in the presence of high-frequency trading (HFT): the Continuous Double Auction (CDA), also known as the continuous limit order book, which organizes trade in the majority of equities, futures and currency exchanges around the world; and the Frequent Batch Auction (FBA), which gives equal time priority to orders received within a short batching period. Our evidence suggests that, relative to the CDA, the FBA (1) reduces predatory trading behavior, (2) disincentivizes investment in low-latency messaging technology, and (3) results in lower transaction costs. Further, volatility in minimum spreads and in liquidity is higher in CDA compared to the FBA. Finally, we examine transitory, off-equilibrium behavior. In the CDA, transitory changes in the environment affect market dynamics substantially more than in the FBA..
Recommended citation: Aldrich, E. and López Vargas, K., (2018). “Experiments in High-Frequency Trading: Testing the Frequent Batch Auction.” Working Paper.