Working Paper: NBER ID: w20588
Authors: Songzi Du; Haoxiang Zhu
Abstract: This paper studies the welfare consequence of increasing trading speed in financial markets. We build and solve a dynamic trading model, in which traders receive private information of asset value over time and trade strategically with demand schedules in a sequence of double auctions. A stationary linear equilibrium and its efficiency properties are characterized explicitly in closed form. Infrequent trading (few double auctions per unit of time) leads to a larger market depth in each trading period, but frequent trading allows more immediate asset re-allocation after new information arrives. Under natural conditions, the socially optimal trading frequency coincides with information arrival frequency for scheduled information releases, but can (far) exceed information arrival frequency for stochastic information arrivals. If traders have heterogeneous trading speeds, fast traders prefer the highest feasible trading frequency, whereas slow traders tend to prefer a strictly lower frequency.
Keywords: Welfare; Trading Frequency; Double Auctions
JEL Codes: D44; D82; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading frequency (G14) | market efficiency (G14) |
| trading frequency (G14) | asset allocation efficiency (G11) |
| trading frequency (G14) | aggressive demand schedules (C69) |
| aggressive demand schedules (C69) | less efficient allocations (D61) |
| optimal trading frequency (G14) | information arrival frequency (D83) |
| trading frequency (G14) | market welfare (D69) |
| trader heterogeneity (F12) | trading frequency (G14) |
| trading speed preferences (C69) | market outcomes (P42) |