5 ms·

It's Friday, so I'd like to float a stupid idea: can't we trade through the day in blocks of like 10 minutes? That is the market takes all information for the l

It's Friday, so I'd like to float a stupid idea: can't we trade through the day in blocks of like 10 minutes? That is the market takes all information for the last 10 minutes (kept in secret) and then integrates it using a public match-making algorithm, and publishes the result. You might even get a little fancy and specify that you want your order to get into the next bin, not this one. The idea is that markets are for humans to allocate capital to other humans, usually in businesses that cater to the needs of humans. If that is the purpose of a market, then I don't see why we can't limit ourselves to 6 integrations an hour, or something like 40 per day. (Heck, I'm personally in favor of having one integration per hour - limiting the allocation decisions to like 8 per day. How can even a professional investor make more than 8 allocation decisions a day if he's investing on fundamentals?)

animefan 11y ago
One issue is that this will still require people to behave strategically, since the auction is a complex game when you take into account everyone's information. In theory, continuous trading should be the simplest game, and let people focus on their individual information and liquidity needs. In practice it certainly induces strategic behavior, but it might still be the simplest system. The real problem in my opinion is the active human trading that drives these markets. The only reason there is so much is that people irrationally invest with actively traded funds. In fact if people were perfectly rational there would probably be too little price discovery, as people world but market portfolios and any other trade would stand out as information based. But in practice we are way on the other side of the spectrum, with way more active trading than is socially optimal.
wdewind 11y ago
I think you're vastly underestimating how quickly markets change, how technically difficult it would be to provide breaking information fairly at the ten minute mark and how important liquidity is to the market. If we slowed trades down then the economy would be significantly less responsive and markets in other countries would have significant advantages. Shorter answer: If I can gain a profit now instead of in 10 minutes I can reinvest just as quickly and the entire economy benefits. These small chunks add up.
kasey_junk 11y ago
It seems you may be working under an incorrect (though very common on HN) assumption. The capital allocation component of the markets is not done via the purchase of shares in a company (i.e. if you buy shares you aren't allocating capital to that company) but when you sell them. The cash that comes from that sale (and maybe from dividend payments in the interim) can be used to fund other ventures (such as your retirement). The funding of new businesses for instance happens on private markets/deals (and commodities futures are even more obviously not about new ventures). With that lens, its more obvious that there is no more morally superior to "invest on fundamentals" than it is to buy with a dartboard, what is at issue is being able to get cash out of ventures when you know longer want to be in them. To that end we want a market that brings the most people together on prices they agree on, with the cheapest amount of transaction cost. Batch auctions (what you are describing) make bridging the gap between buyer and seller more risky (and if you don't outline your tie breaker algorithm, may not even change the speed race) and do not solve the venue arbitrage component at all. This added risk for no gain adds to the transaction costs of the market making it less efficient. There exist currently, many venues that support batch auctions and they have the reputation of being more gamed than continuous trading, because the complexity of the auction.
- javajosh 11y ago
  >It seems you may be working under an incorrect (though very common on HN) assumption...[markets are for liquidity, not allocation] My assumption is that the existence of HFT hurts the market as a whole, and hurts the economy as a whole; it is, essentially, a systematic hack that allows smart programmers to get money for nothing other than being smart enough to game the system. That is one assumption that could (should!) be challenged. Batch auctions (thanks for the term!) quantize trades in time, eliminating HFT. The other being that quantized trading, even if implemented, would not actually eliminate HFT. This could also be challenged. But my inexpert confusing of liquidity and allocation is a bit of a red-herring.
ThrustVectoring 11y ago
That's pretty close to a much better idea - trading through the day in blocks of one second. At a human-level scale, it makes basically zero difference whether a market is continuous or updates every second, but it completely removes latency arbitrage.
- harmegido 11y ago
  I disagree. Let's say that over the course of 1 second, there accumulate 100 lots to buy at 10 and 80 lots to sell at 10. Of those 100, who gets filled? There are several different algorithms for determining this in practice today, of which pro-rata and fifo are the primary ones. Each has their own disadvantages and most give some preference to being there first, which reintroduces latency into the game. I've seen some people speculate about a random allocation. I think this essentially boils down to pro-rata though, as you could game this by sending n 1-lots instead of 1 n-lot.
- kasey_junk 11y ago
  Besides the fact that batch auctions don't say anything about matching algorithm (which you'd need to deal with to remove speed advantages), they don't do anything to address venue arbitrage (of which, this latency arb is just one form). The only way to remove venue arbitrage is to only have 1 venue for trading everything. This is both a) impossible and b) not desirable. We actively created the fragmentation in the US equities markets for a reason, which was that a single monopolistic exchange was bad for most everyone.
vasilipupkin 11y ago
one big problem with batch auctions at any frequency is that there are many assets around the world and, if they are not synchronized precisely, there will be massive arbitrage opportunities as assets get mispriced relative to each other, so overall pricing would become a lot less eficient.

animefan 11y ago

One issue is that this will still require people to behave strategically, since the auction is a complex game when you take into account everyone's information. In theory, continuous trading should be the simplest game, and let people focus on their individual information and liquidity needs. In practice it certainly induces strategic behavior, but it might still be the simplest system. The real problem in my opinion is the active human trading that drives these markets. The only reason there is so much is that people irrationally invest with actively traded funds. In fact if people were perfectly rational there would probably be too little price discovery, as people world but market portfolios and any other trade would stand out as information based. But in practice we are way on the other side of the spectrum, with way more active trading than is socially optimal.

wdewind 11y ago

I think you're vastly underestimating how quickly markets change, how technically difficult it would be to provide breaking information fairly at the ten minute mark and how important liquidity is to the market. If we slowed trades down then the economy would be significantly less responsive and markets in other countries would have significant advantages. Shorter answer: If I can gain a profit now instead of in 10 minutes I can reinvest just as quickly and the entire economy benefits. These small chunks add up.

kasey_junk 11y ago

It seems you may be working under an incorrect (though very common on HN) assumption. The capital allocation component of the markets is not done via the purchase of shares in a company (i.e. if you buy shares you aren't allocating capital to that company) but when you sell them. The cash that comes from that sale (and maybe from dividend payments in the interim) can be used to fund other ventures (such as your retirement). The funding of new businesses for instance happens on private markets/deals (and commodities futures are even more obviously not about new ventures). With that lens, its more obvious that there is no more morally superior to "invest on fundamentals" than it is to buy with a dartboard, what is at issue is being able to get cash out of ventures when you know longer want to be in them. To that end we want a market that brings the most people together on prices they agree on, with the cheapest amount of transaction cost. Batch auctions (what you are describing) make bridging the gap between buyer and seller more risky (and if you don't outline your tie breaker algorithm, may not even change the speed race) and do not solve the venue arbitrage component at all. This added risk for no gain adds to the transaction costs of the market making it less efficient. There exist currently, many venues that support batch auctions and they have the reputation of being more gamed than continuous trading, because the complexity of the auction.

javajosh 11y ago
>It seems you may be working under an incorrect (though very common on HN) assumption...[markets are for liquidity, not allocation] My assumption is that the existence of HFT hurts the market as a whole, and hurts the economy as a whole; it is, essentially, a systematic hack that allows smart programmers to get money for nothing other than being smart enough to game the system. That is one assumption that could (should!) be challenged. Batch auctions (thanks for the term!) quantize trades in time, eliminating HFT. The other being that quantized trading, even if implemented, would not actually eliminate HFT. This could also be challenged. But my inexpert confusing of liquidity and allocation is a bit of a red-herring.

ThrustVectoring 11y ago

That's pretty close to a much better idea - trading through the day in blocks of one second. At a human-level scale, it makes basically zero difference whether a market is continuous or updates every second, but it completely removes latency arbitrage.

harmegido 11y ago
I disagree. Let's say that over the course of 1 second, there accumulate 100 lots to buy at 10 and 80 lots to sell at 10. Of those 100, who gets filled? There are several different algorithms for determining this in practice today, of which pro-rata and fifo are the primary ones. Each has their own disadvantages and most give some preference to being there first, which reintroduces latency into the game. I've seen some people speculate about a random allocation. I think this essentially boils down to pro-rata though, as you could game this by sending n 1-lots instead of 1 n-lot.
kasey_junk 11y ago
Besides the fact that batch auctions don't say anything about matching algorithm (which you'd need to deal with to remove speed advantages), they don't do anything to address venue arbitrage (of which, this latency arb is just one form). The only way to remove venue arbitrage is to only have 1 venue for trading everything. This is both a) impossible and b) not desirable. We actively created the fragmentation in the US equities markets for a reason, which was that a single monopolistic exchange was bad for most everyone.

vasilipupkin 11y ago

one big problem with batch auctions at any frequency is that there are many assets around the world and, if they are not synchronized precisely, there will be massive arbitrage opportunities as assets get mispriced relative to each other, so overall pricing would become a lot less eficient.