Order Protection Through Delayed Messaging

Abstract

Several financial exchanges (e.g., IEX and NYSE American) recently introduced messaging delays to protect ordinary investors from high-frequency traders who exploit stale orders. To capture the impact of such delays, we propose a simple parametric model of the continuous double auction market format. The model examines the dynamics of midpoint pegged order queues and finds their steady states. It shows how messaging delays can protect pegged orders and improve investor welfare, but typically increase queuing costs. Recently available field data show that the empirical distribution of queued pegged orders is highly leptokurtotic and resembles the discrete Laplace distribution predicted by the model. This paper was accepted by Haoxiang Zhu, finance. Funding: Financial support from the European Research Council under the European Union’s Horizon 2020 research and innovation programme [Grant 741409] and the Center for Analytical Finance at the University of California Santa Cruz [seed funding of the Experimental High-Frequency Trading project, of which this paper is a part] is gratefully acknowledged. Supplemental Material: The online supplement is available at https://doi.org/10.1287/mnsc.2022.4370 .