Flow Trading: A Laboratory Test
R&R AEJ Micro 2025
The Flow Market format, proposed by Kyle and Lee (2017), is intended to improve on the Continuous Double Auction (CDA) format currently used in most financial markets worldwide. The Flow Market format enables traders to specify, as a function of current price, a finite speed (in shares per second) at which they will buy or sell shares. This new format is intended to protect traders from exploitation by highfrequency trading (HFT) firms and to effectively shred orders to mitigate adverse price impact. We report a human participants experiment comparing the Flow and CDA formats in a simple laboratory environment. We find that the Flow format enhances liquidity and encourages traders to send fewer and larger orders, indicating more effective shredding. The two formats do not significantly differ in terms of price and allocative efficiency in our environment. However, the Flow Market leads to lower price volatility and perhaps to smaller asymmetries in profits. Total trade volume is lower under the Flow Market than under CDA, but the gap narrows in later periods as traders begin to master the mechanics of the Flow format. Our findings provide initial insights into the Flow format and hint of its potential to improve financial market performance.
Recommended citation: Friedman, D. & Li, Y. & López Vargas, K. (2025). "Flow Trading: A Laboratory Test." Working Paper..