Clearing time randomization and transaction fees for auction market design

TL;DR

This paper investigates how randomizing auction closing times and implementing optimal transaction fees can improve the efficiency of periodic auction markets by discouraging strategic late trading, supported by empirical data from major stocks.

Contribution

It introduces and quantifies the effects of closing time randomization and transaction fee policies to mitigate strategic trading in periodic auctions.

Findings

Randomizing closing times reduces strategic late trading.

Optimal transaction fees encourage earlier order submission.

Policies improve market efficiency as shown with Alphabet and Apple data.

Abstract

Flaws of a continuous limit order book mechanism raise the question of whether a continuous trading session and a periodic auction session would bring better efficiency. This paper wants to go further in designing a periodic auction when both a continuous market and a periodic auction market are available to traders. In a periodic auction, we discover that a strategic trader could take advantage of the accumulated information available along the auction duration by arriving at the latest moment before the auction closes, increasing the price impact on the market. Such price impact moves the clearing price away from the efficient price and may disturb the efficiency of a periodic auction market. We thus propose and quantify the effect of two remedies to mitigate these flaws: randomizing the auction's closing time and optimally designing a transaction fees policy for both the strategic traders and other market participants. Our results show that these policies encourage a strategic trader to send their orders earlier to enhance the efficiency of the auction market, illustrated by data extracted from Alphabet and Apple stocks.