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> Thanks for the insight, would appreciate any recommendation on where I can read more about this.


This is sort of the standard textbook on how exchanges and markets work, and has a nice discussion of the tradeoffs inherent in call auctions vs continuous time trading.

If you really want to get deep and are comfortable with math, this paper:


explains the general framework market makers are using to make decisions.

> I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk. Ultimately, market makers are service providers. They are selling liquidity to people, and they get compensated for that. What that means is that they will go wherever their clients go. And they wouldn't necessarily make less money in a higher spread regime, larger spreads mean bigger margins for the MMs. I think they probably would overall make less, because volume would decline so much, but it's just a little more complex than more risk == bad.

> But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?

It's a little complicated. I mean, the sort of facile answer is: they wouldn't, and don't. We have a free market, if anyone wanted to they could start one of these up right now.

A slightly better answer is that some clients would prefer it and some wouldn't, and there's a reasonable argument to be made that the ones who would prefer it are more important to healthy market functioning. Specifically, it'd be much better for larger asset managers who research stocks and make careful picks based on rigorous analysis.

Right now, those asset managers, who are the people that really make the markets efficient, are being statistically frontrun by HFTs, both market makers and others. That is, some MM notices someone buying large blocks in a pattern consistent with one of these smart asset managers, and they label this "toxic flow". Backing up slightly, market makers want to sell to dumb money.

Consider a world where the only trades that occur are by "smart money". Someone only trades if they know the stock is going to go up or down, and there is no other trading activity aside from this. In this world, the MMs would make zero money, because they'd be constantly getting "adverse selected". MMs make profits roughly in proportion to the overall quantity of dumb/smart money. They make money when lots of trading happens, but the price doesn't go anywhere.

Getting back to the main thread, MMs are constantly trying to identify "smart money", and when they find that smart money, they either re-center their spread in the direction the smart money is trading, widen their spreads, or stop providing liquidity entirely. Continuous time trading makes it considerably easier to separate smart and dumb money than a batch auction would, and this means that overall these smart managers are making lower profits than they otherwise "should".

The flipside of this though is that these tactics actually improve the price that retail traders get. This is why Citadel buys Robinhood's order flow, and then offers them better prices than the open market does. They can do this because they "know" that all of the Robinhood flow is dumb money, and consequently they can safely tighten their spreads for those users.

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