Frequent Batch Auctions Under Liquidity Constraints

63 Pages Posted: 19 Feb 2021

See all articles by Zeyu Zhang

Zeyu Zhang

University of Edinburgh Business School

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Date Written: December 18, 2020

Abstract

We exploit European regulatory interventions to investigate the effects of sub-second periodic auctions on market quality under dark trading restrictions. The restrictions are linked to an observable increase in periodic auctions and an economically meaningful loss of liquidity. While periodic auctions ameliorate illiquidity, their effects are significantly less than those of the restrictions; therefore, the combined effects of periodic auctions’ increases and the restrictions are general declines in liquidity and informational efficiency. However, consistent with theory, periodic auctions are linked to reductions in adverse selection costs, thereby underscoring their potential to address latency arbitrage and the technological arms race.

Keywords: Frequent batch auctions; dark trading; MiFID II; latency arbitrage; liquidity; informational efficiency

JEL Classification: G14; G15; G18

Suggested Citation

Zhang, Zeyu and Ibikunle, Gbenga, Frequent Batch Auctions Under Liquidity Constraints (December 18, 2020). Available at SSRN: https://ssrn.com/abstract=3752032 or http://dx.doi.org/10.2139/ssrn.3752032

Zeyu Zhang (Contact Author)

University of Edinburgh Business School ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, EH8 8BA
United Kingdom

Gbenga Ibikunle

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

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