Don't Hate the Players, Hate the Game: Designing a Provably Trustworthy Stock Market in the Age of High-Frequency Trading

Abstract

Current stock markets are flawed. Although high-frequency trading has provided some benefits to market liquidity, the designs of these markets incentivize high-frequency traders to engage in a technological arms race that harms market efficiency. Moreover, the opacity of many stock markets lets market operators give preferred treatment to some traders at the expense of others, even when doing so is illegal. This thesis extends a recently proposed design that reduces the profitability of high-frequency trading strategies, and by using cryptographic techniques, allows traders and other parties to verify that the market operator has not cheated. A new type of order to buy and sell assets allows traders to succinctly express preferences far more complex than those expressible with current order types, thereby reducing the need for sophisticated and expensive order management systems. Ultimately, this design promises to produce a more efficient and more trustworthy stock market.