How Periodic Auctions Create A More Fair Marketplace By Prioritizing Price Over Speed

Posted by Jim Bai on Sep 6, 2018 12:58:00 PM

EMX Blog - Periodic Auctions

Many traders use speed to their advantage to help them realize higher profits than others. That may work for them, but it doesn’t work for us.

EMX is being built from the ground-up to enable all participants to play at the same level. By using an innovative auction matching engine, traders compete on price — not speed. We want everyone to be on the same playing field regardless of their sophistication, experience or resources.

Exchanges often use an order book that matches buy and sell orders on a continuous basis, with high-frequency-traders (HFTs) often finding the best executions ahead of others because they can more quickly discover orders matching the price they are seeking. They achieve this advantage through co-location (locating their servers next to an exchange’s), faster processors and other optimizations that no retail traders can ever match.

This has created a massive gulf between the HFT infrastructure haves and others who become have nots that has come to dominate many traditional exchanges. We agree with those who see this as a problem.

High Frequency Batch Auctions on EMX: An Elegant Solution

Instead of executing orders as they are submitted, EMX will conduct frequency batch auctions. This means that trades will not be matched purely based on time — but rather based on the discrete batch the trade was included in, initially at 1 second intervals.

These discrete batches should be imperceptible to the naked eye watching a trading UI, but they will make a huge impact on the trading world because they enable someone placing orders from their basement to play on the same field as any investment bank or hedge fund for one simple reason: They remove any incentive created by speed and prioritize price over everything else. The below diagram illustrates how orders will be executed on the exchange at a macro level.

 

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Each auction will match orders at a price that maximizes executable volume, known as the crossing price. Market orders will be matched first and then followed by limit orders. If there is an uneven number of buys and sells at the crossing price, unfilled orders from previous auctions will be matched first, and then remaining orders from the current auction will be filled pro-rata. Orders are never given priority based on when they were submitted, within a batch. The below diagram illustrates the crossing algorithm within an auction.

 

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Better Outcomes

  • Fair: Everyone pays the same price in each auction, and has the same access to market data
  • Accessible: Removing the bid/ask spread has been proven to lower transaction costs
  • Uncomplicated: Fewer tradable time points than traditional exchanges means easier data dissemination for all participants including traders, regulators and other observers

To learn more about trading futures contracts and how to put your cryptocurrency holdings to work for you, please visit our blog. Our white paper also has more details on this and other aspects of EMX’s innovative market structure, it can be viewed here.

Topics: Engineering, Education, EMX Advantages