High-Frequency Trading and the Design of Financial Markets with Eric Budish | a16z crypto research

Financial markets suffer from structural inefficiencies inherent in continuous limit order books, where serial processing of trades creates "sniping" or latency arbitrage. This phenomenon, which functions as a tax on liquidity, drives a wasteful, never-ending arms race for speed, with firms investing billions to shave nanoseconds off execution times. Rather than reflecting fundamental information, these speed advantages exploit the market's inability to process information simultaneously. Frequent Batch Auctions (FBA) offer a corrective mechanism by replacing continuous time with discrete intervals, effectively shifting competition from speed to price. This design, further expanded into "flow trading" for complex portfolios, mitigates the impact of latency and aligns market incentives with efficient price discovery. These insights provide a critical framework for addressing similar challenges in decentralized finance, particularly regarding Miner Extractable Value (MEV) and protocol-level vulnerabilities.