Mandating that stocks trade in set time intervals would negate some of the problems posed by high-frequency trading, according to an analysis gaining some traction.
A trio of academics—University of Chicago professor Eric Budish, the University of Maryland’s Peter Cramton, and John Shim, a doctoral candidate at the Chicago Booth School—have proposed what is known as “frequent batch auctions.” The process involves collecting orders and executing them simultaneously.
Doing so, the trio argued in a paper published in late 2013 and featured this week in Pensions & Investments, would eliminate time advantages gained by computer algorithms that HFT firms use.
“Stocks trade in pennies,” or discrete prices, Budish told P&I in an interview. “If you want to bid more than me, you have to bid at least a penny more than my bet. You can’t bid a millionth or a billionth (penny) more than my bid. And that’s the sense that prices are discrete. There is a minimum price increment. “There are good reasons for that. And we’re in a sense arguing for a minimum time increment” for trading, he said.
Discussion over the plan comes amid more intense scrutiny of high-speed trading, thanks in large part to Michael Lewis’ 2014 book “Flash Boys.” Mary Jo White, the head of the Securities Exchange Commission, said recently that regulators likely will propose some significant changes to the market in the coming months.
To read the full P&I post, go here.