The High-Frequency Trading Arms Race¶
Budish, E., Cramton, P., & Shim, J. (2015). The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response. Quarterly Journal of Economics, 130(4), 1547-1621.
Cited by¶
4 citations across 4 artifacts.
Each citation links to the sentence it supports in the citing article.
Primes¶
- Arbitrage (Finance)
- The mechanics have accelerated from sailing ships (months-long execution) to algorithmic systems (millisecond execution), but the economic principle remains unchanged—a transition that Budish, Cramton, and Shim (2015) document as a continuous-time arms race in which co-located high-frequency traders compete for vanishing arbitrage windows in equity index futures and ETFs.
This sourceModels the millisecond-scale HFT race as a continuous-time arms race that imposes a hidden tax on liquidity; co-located HFTs compete for vanishing arbitrage windows in equity index futures and ETFs (e.g., ES vs. SPY); proposes frequent batch auctions as an alternative microstructure.
Supported in partVerified against the work's full text
Budish et al. document a millisecond HFT arms race over ES/SPY arbitrage opportunities that shorten over time; they do not cover the sailing-ship history or an unchanged principle across eras.
“while there is an arms race in speed, the arms race does not actually affect the size of the arbitrage prize; rather, it just continually raises the bar for how fast one has to be to capture a piece of the prize.”
- The mechanics have accelerated from sailing ships (months-long execution) to algorithmic systems (millisecond execution), but the economic principle remains unchanged—a transition that Budish, Cramton, and Shim (2015) document as a continuous-time arms race in which co-located high-frequency traders compete for vanishing arbitrage windows in equity index futures and ETFs.
- Efficient Market Hypothesis (EMH)
- … that high-frequency trading does not unambiguously improve efficiency: the continuous-limit-order-book design generates a sniping arms race that imposes deadweight latency-investment costs and motivates frequent batch auctions as a microstructural redesign that better aligns with EMH's information-aggregation goals.
This sourceShows the continuous-limit-order-book design generates a sniping arms race (a hidden tax on liquidity) and proposes frequent batch auctions.
Supported in partVerified against the work's full text
Budish, Cramton and Shim show the continuous-book sniping arms race is a socially wasteful prisoner's dilemma and propose frequent batch auctions, but never frame this in terms of EMH.
“snipers invest in speed to try to win the race to snipe stale quotes; liquidity providers invest in speed to try to get out of the way of the snipers”
- … that high-frequency trading does not unambiguously improve efficiency: the continuous-limit-order-book design generates a sniping arms race that imposes deadweight latency-investment costs and motivates frequent batch auctions as a microstructural redesign that better aligns with EMH's information-aggregation goals.
- Liquidity
- Modern market design makes this formalism explicit: Budish, Cramton, and Shim (2015) modeled the millisecond-scale "race" of high-frequency traders as a continuous-time arms race that imposes a hidden tax on liquidity, and proposed frequent batch auctions as an alternative microstructure that recovers welfare by replacing continuous-time matching with discrete-time clearing.
This sourceModels the millisecond-scale HFT race as a continuous-time arms race that imposes a hidden tax on liquidity; proposes frequent batch auctions as an alternative microstructure that replaces continuous matching with discrete-time clearing to recover welfare.
SupportedVerified against the work's full text
The paper models the speed contest as "a never-ending socially wasteful arms race for speed" whose mechanical arbitrage rents "harm liquidity provision", and proposes that "time should be treated as discrete instead of continuous, and orders should be processed in a batch auction instead of serially". Frequent batch auctions, it holds, eliminate those rents, enhance liquidity for investors, and stop the arms race. That is the diagnosis and the remedy the sentence attributes to it. The phrases hidden tax on liquidity and recovers welfare are the article's; the work states the elimination of arbitrage rents and enhanced liquidity for investors.
“These rents harm liquidity provision and induce a never-ending socially wasteful arms race for speed. Last, we show that frequent batch auctions directly address the flaws of the continuous limit order book.”
- Modern market design makes this formalism explicit: Budish, Cramton, and Shim (2015) modeled the millisecond-scale "race" of high-frequency traders as a continuous-time arms race that imposes a hidden tax on liquidity, and proposed frequent batch auctions as an alternative microstructure that recovers welfare by replacing continuous-time matching with discrete-time clearing.
- Tempo Mismatch
- In markets a strategy whose signal-to-execution time exceeds the price-update timescale takes positions on stale beliefs, which is why high-frequency infrastructure exists at all.
SupportedVerified against the work's full text
Budish et al. show quotes left stale after a public price jump get sniped by faster traders, and that this is what drives investment in speed technology.
“snipers invest in speed to try to win the race to snipe stale quotes; liquidity providers invest in speed to try to get out of the way of the snipers”
- In markets a strategy whose signal-to-execution time exceeds the price-update timescale takes positions on stale beliefs, which is why high-frequency infrastructure exists at all.
Verification¶
Does it exist? Confirmed. This work's DOI resolves to a registered record, which fixes its identity. That is all it fixes.
Does it back the claim? Read against the text for 4 of 4 citations: 2 supported, 2 supported in part. Each verdict is shown under its citation below, with what in the work backs the sentence.
Support is checked per citation rather than per work — the same source can be cited soundly in one article and wrongly in another. Per-citation recording began recently, so a citation with no recorded check is a gap in the record rather than evidence it went unchecked.
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