The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions

Zeyu Zhang; Gbenga Ibikunle

doi:10.1016/j.irfa.2023.102737

The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions

Zeyu Zhang, Gbenga Ibikunle^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract / Description of output

Recent European regulatory restrictions on dark trading induced an increase in sub-second frequent batch/periodic auctions (PA). We exploit this development to investigate the effects of PA on market quality. The restrictions are linked to an observable increase in PA and an economically meaningful loss of liquidity. PA is also associated with a significant decline in liquidity and informational efficiency. However, consistent with Budish et al. (2015 – The Quarterly Journal of Economics, 130, 1547), increased execution via PA leads to a decline in adverse selection costs, which underscores its potential as a trading mechanism for addressing latency arbitrage and the technological arms race.

Original language	English
Article number	102737
Pages (from-to)	1-18
Number of pages	18
Journal	International Review of Financial Analysis
Volume	89
Early online date	30 Jun 2023
DOIs	https://doi.org/10.1016/j.irfa.2023.102737
Publication status	Published - Oct 2023

Keywords / Materials (for Non-textual outputs)

periodic auctions
dark trading
MiFID II
latency arbitrage
liquidity
informational efficiency

Access to Document

10.1016/j.irfa.2023.102737Licence: Creative Commons: Attribution (CC-BY)

ZhangZIbikunleG2023IRFATheMarketQualityEffectsFinal published version, 0.98 MBLicence: Creative Commons: Attribution (CC-BY)

Cite this

@article{a38a7839ebcf4982a26ac8dbb3b26c6f,

title = "The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions",

abstract = "Recent European regulatory restrictions on dark trading induced an increase in sub-second frequent batch/periodic auctions (PA). We exploit this development to investigate the effects of PA on market quality. The restrictions are linked to an observable increase in PA and an economically meaningful loss of liquidity. PA is also associated with a significant decline in liquidity and informational efficiency. However, consistent with Budish et al. (2015 – The Quarterly Journal of Economics, 130, 1547), increased execution via PA leads to a decline in adverse selection costs, which underscores its potential as a trading mechanism for addressing latency arbitrage and the technological arms race.",

keywords = "periodic auctions, dark trading, MiFID II, latency arbitrage, liquidity, informational efficiency",

author = "Zeyu Zhang and Gbenga Ibikunle",

note = "Publisher Copyright: {\textcopyright} 2023 The Author(s)",

year = "2023",

month = oct,

doi = "10.1016/j.irfa.2023.102737",

language = "English",

volume = "89",

pages = "1--18",

journal = "International Review of Financial Analysis",

issn = "1057-5219",

publisher = "Elsevier",

}

TY - JOUR

T1 - The market quality effects of sub-second frequent batch auctions

T2 - Evidence from dark trading restrictions

AU - Zhang, Zeyu

AU - Ibikunle, Gbenga

PY - 2023/10

Y1 - 2023/10

N2 - Recent European regulatory restrictions on dark trading induced an increase in sub-second frequent batch/periodic auctions (PA). We exploit this development to investigate the effects of PA on market quality. The restrictions are linked to an observable increase in PA and an economically meaningful loss of liquidity. PA is also associated with a significant decline in liquidity and informational efficiency. However, consistent with Budish et al. (2015 – The Quarterly Journal of Economics, 130, 1547), increased execution via PA leads to a decline in adverse selection costs, which underscores its potential as a trading mechanism for addressing latency arbitrage and the technological arms race.

AB - Recent European regulatory restrictions on dark trading induced an increase in sub-second frequent batch/periodic auctions (PA). We exploit this development to investigate the effects of PA on market quality. The restrictions are linked to an observable increase in PA and an economically meaningful loss of liquidity. PA is also associated with a significant decline in liquidity and informational efficiency. However, consistent with Budish et al. (2015 – The Quarterly Journal of Economics, 130, 1547), increased execution via PA leads to a decline in adverse selection costs, which underscores its potential as a trading mechanism for addressing latency arbitrage and the technological arms race.

KW - periodic auctions

KW - dark trading

KW - MiFID II

KW - latency arbitrage

KW - liquidity

KW - informational efficiency

U2 - 10.1016/j.irfa.2023.102737

DO - 10.1016/j.irfa.2023.102737

M3 - Article

SN - 1057-5219

VL - 89

SP - 1

EP - 18

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

M1 - 102737

ER -

The market quality effects of sub-second frequent batch auctions: Evidence from dark trading restrictions

Abstract / Description of output

Keywords / Materials (for Non-textual outputs)

Access to Document

Fingerprint

Cite this