6 ms·

Was it HFT or the move to electronic trading that reduced the bid/ask spread by 10x?

justinjlynn 11y ago
Certainly electronic trading. I've found this to be an excellent article deflating HFT benefit myths: http://www.nanex.net/aqck2/4594.html http://www.nanex.net/aqck2/4594.html
- MichaelGG 11y ago
  The article is a bit suspicious. It talks about Thor, which timed orders to different exchanges so they'd arrive simultaneously. This is because a market maker would notice a large order on one exchange, and raise his price. This is totally and utterly expected - why should a market maker take undue risk? Increase the latency - suppose a user submitted a large buy order to Exchange1, waited an hour, then sent it to Exchange2. Is it not reasonable that the price would go up? So why is it suddenly so controversial when it happens on shorter timeframes? Why should RBC be able to make big trades and not have to deal with price impact? Why should market makers be left holding the bag? Now whether or not HFT adds more value seems debatable. But it seems to be a fairly harmless result that naturally arises.
- mrchicity 11y ago
  HFT has been around for a while longer than Reg NMS: http://www.bizjournals.com/kansascity/stories/2005/01/17/smallb1.html http://www.bizjournals.com/kansascity/stories/2005/01/17/sma... describes an major player doing something that sounds similar to modern HFT in Jan 2005, presumably they'd been trading that way for a while.
harryh 11y ago
HFT. It's basic automation. Taking (slow, expensive) human decision makers out of the loop drastically reduced costs.
gnaritas 11y ago
You cannot really separate the two. If you support electronic trading, no matter what artificial restrictions you put on speed, the first person to get his order in will win, they will always compete on latency.
- MichaelGG 11y ago
  If you allowed arbitrary precision (or even 8 decimals) then there'd be a bit less emphasis on latency, right? As is, a penny is worth quite a bit so everyone has to queue up at the same price making speed win.
  - harmegido 11y ago
    No there's a minimum spread that will exist because market makers won't make markets so tight that they are losing money. If they can't make money on the spread, then what's the point of posting that spread? These discussions always happen whenever HFT is brought up. I've thought a LOT about how to remove a latency advantage from this game, and I just can't find a way to do it. I'd love to be proven wrong though. (And actually, so would the HFT shops - they hate the speed race).
    - MichaelGG 11y ago
      What stops an exchange from quantizing to, say, a second or so? Use proportional matching, or something even more clever like POSIT does. I'm sure there's a reason that this simple idea doesn't work but I haven't figured it out yet. As far as more decimals, it doesn't sound plausible that all the market makers are gonna come up with the same price to 8 decimals. So the time priority will give way a bit to price priority.
      - gnaritas 11y ago
        > What stops an exchange from quantizing to, say, a second or so? That wouldn't be fair, an order book is a line, such a rule would allow people to cut line and get shares at better prices before you allowing them to drive the price up or down even though you were in line before them. > As far as more decimals, it doesn't sound plausible that all the market makers are gonna come up with the same price to 8 decimals. So the time priority will give way a bit to price priority. That's how it used to be, compete on price first, but a minimum decimal put in place by law, the sub penny rule, to try and dampen HFT, it's only made latency more important since HFT traders can no longer compete on price. And he's right, there's always a minimum price below which there is no profit, so whoever posts that price first wins. Orders compete on time and price because that what is fair. Latency is inherently part of fair trading, you can't remove it and keep the market fair.

Certainly electronic trading. I've found this to be an excellent article deflating HFT benefit myths: http://www.nanex.net/aqck2/4594.html http://www.nanex.net/aqck2/4594.html

MichaelGG 11y ago
The article is a bit suspicious. It talks about Thor, which timed orders to different exchanges so they'd arrive simultaneously. This is because a market maker would notice a large order on one exchange, and raise his price. This is totally and utterly expected - why should a market maker take undue risk? Increase the latency - suppose a user submitted a large buy order to Exchange1, waited an hour, then sent it to Exchange2. Is it not reasonable that the price would go up? So why is it suddenly so controversial when it happens on shorter timeframes? Why should RBC be able to make big trades and not have to deal with price impact? Why should market makers be left holding the bag? Now whether or not HFT adds more value seems debatable. But it seems to be a fairly harmless result that naturally arises.
mrchicity 11y ago
HFT has been around for a while longer than Reg NMS: http://www.bizjournals.com/kansascity/stories/2005/01/17/smallb1.html http://www.bizjournals.com/kansascity/stories/2005/01/17/sma... describes an major player doing something that sounds similar to modern HFT in Jan 2005, presumably they'd been trading that way for a while.

harryh 11y ago

HFT. It's basic automation. Taking (slow, expensive) human decision makers out of the loop drastically reduced costs.

gnaritas 11y ago

You cannot really separate the two. If you support electronic trading, no matter what artificial restrictions you put on speed, the first person to get his order in will win, they will always compete on latency.

MichaelGG 11y ago
If you allowed arbitrary precision (or even 8 decimals) then there'd be a bit less emphasis on latency, right? As is, a penny is worth quite a bit so everyone has to queue up at the same price making speed win.
- harmegido 11y ago
  No there's a minimum spread that will exist because market makers won't make markets so tight that they are losing money. If they can't make money on the spread, then what's the point of posting that spread? These discussions always happen whenever HFT is brought up. I've thought a LOT about how to remove a latency advantage from this game, and I just can't find a way to do it. I'd love to be proven wrong though. (And actually, so would the HFT shops - they hate the speed race).
  - MichaelGG 11y ago
    What stops an exchange from quantizing to, say, a second or so? Use proportional matching, or something even more clever like POSIT does. I'm sure there's a reason that this simple idea doesn't work but I haven't figured it out yet. As far as more decimals, it doesn't sound plausible that all the market makers are gonna come up with the same price to 8 decimals. So the time priority will give way a bit to price priority.
    - gnaritas 11y ago
      > What stops an exchange from quantizing to, say, a second or so? That wouldn't be fair, an order book is a line, such a rule would allow people to cut line and get shares at better prices before you allowing them to drive the price up or down even though you were in line before them. > As far as more decimals, it doesn't sound plausible that all the market makers are gonna come up with the same price to 8 decimals. So the time priority will give way a bit to price priority. That's how it used to be, compete on price first, but a minimum decimal put in place by law, the sub penny rule, to try and dampen HFT, it's only made latency more important since HFT traders can no longer compete on price. And he's right, there's always a minimum price below which there is no profit, so whoever posts that price first wins. Orders compete on time and price because that what is fair. Latency is inherently part of fair trading, you can't remove it and keep the market fair.