[akvadrako]

Is there any mathematical proof that it's harder to game batch auctions than what we have now?

For example, while other markets and the real world moves on, you gain info. So the later in the batch you can submit a trade, the greater your advantage.

[lpage]

See Proposition 6 on pg. 1600. The argument is purely economic and based on a simplified (but first-order reasonable) model of liquidity provisioning and price action. Price-priority uniform clearing price batch auctions (with or without randomized call times) transform competition over speed into competition over price.

Technical/practitioner notes:

1. Gaming is a bit of an overloaded term, and in this context, implies that agents are doing something wrong. Mechanism design assumes that agents will respond rationally and strategically to the mechanism they're presented with, so whatever happens is on the designer. Ideally, the mechanism chosen will result in an individual response that collectively optimize the designer's objective function, e.g., maximizing social welfare or the auctioneer revenues. Suppose the mechanism chosen isn't the "best" one for a specific set of agents & goods. In that case, agents might have individually rational behaviors that result in sub-optimal outcomes relative to what was achievable with another mechanism.

2. Prop 6 isn't entirely predicated on having a random call time (there will be competition over price as long as there are two "fast" types in the market). However, randomizing auction call times is still practically speaking useful.

[anonu]

The US Markets generally operate multiple sessions: pre open, on-open, regular-market trading, on-close, post-close or after-hours.

Open and closing auctions are batch auctions.

To facilitate liquidity seeking, the major exchanges publish a periodic "imbalance" feeds in the minutes and seconds up to the auction. As you can imagine, its gamed in a multitude of ways, including special order types (D-Quotes on the NYSE anyone?) that only a select few market participants know about or have access to.

The point is, whatever mechanism you choose: over time that mechanism morphs and transforms. New options are provided under the guise of liquidity seeking but really serve to benefit the HFTs.

[aserafini]

That was my initial thought as well: this would just become an arms race to submit your trade last? But maybe if the trades were priority queued it would negate that.

[fighterpilot]

Correct. I believe you need to randomize the auction time. This massively reduces the speed advantage. Without that speed is as important as ever.

How does a priority queue work?

[akvadrako]

That just leads to the same question: is there proof its harder to game random batches?

[fighterpilot]

Gameability is distinct to whether there is an advantage to low latency. A random batch auction will be gameable but not so much via speed. Not sure how a math proof would work for that though.

[harryh]

But maybe if the trades were priority queued it would negate that.

If the trades are priority queued, then you have just recreated the speed "arms race" that this idea hopes to eliminate.

[aserafini]

But if you submit your trade ‘first’ you miss out on any information that arrives afterwards.

Maybe it cancels out the advantage of being ‘first’? I am admittedly well outside my area of expertise.

[hcarlens]

The ones that are currently live tend to have features that try to negate this (randomised uncrossing times, price collars, order priority based on arrival time or size)