The David
Crighton Lecture 2016
Thursday 12 May 2016
at The Royal Society, Carlton House Terrace, London, SW1Y 5AG.
How would an ideal market operate, to allow liquidity between long-term investors to be provided by short-term traders? In the second part of the talk we describe some preliminary work, joint with Elena Yudovina [3], on this question. We describe a simplified and analytically tractable model of a limit order book where the dynamics are driven by stochastic fluctuations between supply and demand. The model has a natural interpretation for a highly traded market on short time scales where there is a separation between the time scale of trading, represented in the model, and a longer time scale on which fundamentals change.
There has been considerable discussion recently of the effects of competition between multiple high-frequency traders, and of proposals aimed to slow down markets. A key issue is that traders may compete on the speed with which they can snipe an order rather than compete on price, and a proposed regulatory response is to use frequent batch auctions. Our model is clearly a caricature of a real limit order book, but it does provide insight into various high-frequency trading strategies (for example market-making, sniping and mixtures of these) and the impact on Nash equilibria when a market in continuous time is replaced by frequent batch auctions.
slides,
Mathematics
Today report,
LMS Newsletter report.