Strategic market choice: Frequent call markets vs. continuous double auctions for fast and slow traders

Abstract

Frequent call markets have been proposed as a market design solution to the latency arms race perpetuated by high-frequency traders in continuous markets, but the path to widespread adoption of such markets is unclear. If such trading mechanisms were available, would anyone want to use them? This is ultimately a question of market choice, thus we model it as a game of strategic market selection, where agents choose to participate in either a frequent call market or a continuous double auction. Our market environment is populated by fast and slow traders, who reenter to trade at different rates. We employ empirical game-theoretic methods to determine the market types and trading strategies selected in equilibrium. We also analyze best-response patterns to characterize the frequent call market's basin of attraction. Our findings show that in equilibrium, welfare of slow traders is generally higher in the call market. We also find strong evidence of a predator-prey relation between fast and slow traders: the fast traders chase agents into either market, and slow traders under pursuit seek the protection of the frequent call market.