The Design of Financial Exchanges: Some Open Questions at the Intersection of Econ and CS
summary
The continuous limit order book creates sniping rents from symmetric public signals, fueling a never‑ending speed race and reducing displayed liquidity; empirical work finds S&P mini vs SPY arbitrage opportunities worth about $75M/year and durations collapsing from >0.1s in 2005 to <0.01s by 2011. Switching to 100 ms batches and uniform auctions removes serial processing, restores price competition, and simplifies computation: clearing is n log n and was shown to run in ~10 ms on a laptop, eliminating the mechanical-arbitrage incentive.
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chapters (35)
- 0:00Introduction
- 0:28Presentation structure
- 3:10What is a continuous limit order book
- 4:52Conceptual critique of continuous limit order books
- 6:45Free liquidity for investors
- 7:22Call sniping
- 8:22Serial process
- 8:57Three takeaways
- 9:13Why is publicly observable
- 10:56Why is liquidity provision more expensive
- 13:13Mechanical arbitrage example
- 16:01Profitability of arbitrage opportunities
- 16:19The empirical facts
- 18:08Treasury markets
- 19:33Batch auctions
- 19:56Outstanding orders
- 20:08Auction priority
- 20:26Information policy
- 20:45Frequent batch options
- 21:27Burst of activity
- 21:54Price competition
- 22:25Liquidity
- 25:44Regulatory Ambiguity
- 25:55Data feeds
- 26:05IEX
- 27:40Random Delay
- 28:55Qualitative
- 29:09Computational Issues
- 29:39Discrete Time vs Continuous Time
- 32:28Message Processing
- 36:36Clean Paper Trail
- 36:55Open Question
- 38:42Recap
- 39:19A plea
- 39:58Rule changes
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