Toward a fully continuous exchange

Albert S Kyle and Jeongmin Lee

Oxford Review of Economic Policy, 2017, vol. 33, issue 4, 650-675

Abstract: We propose a new market design for a securities exchange that matches ‘continuous scaled limit orders’. This new order type differs from standard limit orders in two ways. First, orders to buy and sell represent flows of shares over time rather than stocks of shares available for immediate purchase or sale. Second, orders are expressed as continuous piecewise linear functions relating price to quantity rather than step functions defined on a discrete grid of prices and quantities. Continuous scaled limit orders implement Fischer Black’s vision of traders limiting temporary price impact by trading gradually over time. They dramatically lessen the rents high-frequency traders earn from the current market design. The proposal is compatible with frequent batch auctions and random time delays.

Keywords: market microstructure; auction design; market design; continuous scaled limit orders; smooth trading; frequent batch auction; VWAP; TWAP; high-frequency trading; liquidity; bid–ask spread; price impact (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (8)

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