7 ms·

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

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.
  - kbenson 11y ago
    > 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. Well, I think the problem is less that the book is a line and it's not fair (the definition of fair would change in this system, it would be fair that you had the same chance as everyone else in that time frame), but more that you open yourself up to different problems, such as the larger players being able to split their orders up in to many smaller orders, to increase they chance a large percentage of their orders will go through before any supply has dried up. There's actually another industry that has to deal with these problems, and especially with pecieved fairness. Online event ticketing. Ticketmaster runs a queue. AXS runs a randomized pool. Both are gamed. Interestingly, I think some brokers actually do colocate close to TM servers, which makes the parallel fairly obvious.
    - eru 11y ago
      Online event ticketing could get rid of scalping completely, by auctioning off the tickets, if there's excess demand.
      - kbenson 11y ago
        That wouldn't eliminate the problem. Demand changes over time, and supply is fixed. There are quite a few ways to invest in tickets. One is to buy all the tickets on an event that is expected to sellout immediately. Another is to find an event that you expect to sellout at some time before the event that will allow enough time for demand to build, and you buy tickets before it sells out. In the end, ticket prices change over time, therefore there will be a market. Even if the primary seller (e.g. TicketMaster) raises prices, if you bought at a time when they were cheaper, you can resell at a profit. Event ticketing is a market, and as such there will be people that want to invest (even if it's just fans who intended to go and then decided they couldn't, or the money they could get for the tickets is too much to pass up). Scalpers (brokers) provide a service, liquidity. Often they go too far, and use technology to get tickets in unethical ways (ignoring site policies, bypassing captchas, using software to tie up thousands of tickets they have no intention of buying, etc). But the fact that they continue to exist is because there is demand (and now TicketMaster is in on the game as well, their TM+ service allows you to resell tickets on their site along-side their own, unsold tickets).
tomjen3 11y ago
The minimum spread isn't a fixed quantity, different traders will have different minimums. Right now there is a price floor, below which the price cannot fall, which is bad for all those who want to transact in the stock market. As for the speed race, why not limit transactions so that they can only be executed on the dot, once every $TIME_STEP? You won't be able to see what orders others have been put out, so you don't gain that much of an advantage by sitting on a very low latency connection.
- mrchicity 11y ago
  This is correct. In ultra-liquid stocks, with a finer tick increment, natural buyers and sellers could undercut the market-makers' spreads since they aren't concerned about making short-term profits. Market-makers could also compete with more diverse pricing. It is not necessarily a bad thing to have a price floor. Removing the floor is a good thing for the parties that meet at the tighter spread, but there is an externality where somebody who wants the shares nearly as much has their order go unexecuted despite providing price discovery to the market by showing their order. Look at GOOGL for example. It is $700 with a $0.01 price increment. Somebody can jump in front of your order by paying just 0.0014% more, there is little incentive to show limit orders on the market, which this makes the order book very thin. There is probably a better balance where the tick is large enough to avoid people jumping your order, but small enough that traders can compete: https://www.sec.gov/comments/4-657/4657-40.pdf https://www.sec.gov/comments/4-657/4657-40.pdf has more comments on these effects. You can trade in a single price auction in almost every market worldwide. A large amount of volume in US equities trades in this way, so people already have this option, but many choose not to use it.
- gnaritas 11y ago
  > As for the speed race, why not limit transactions so that they can only be executed on the dot, once every $TIME_STEP? You won't be able to see what orders others have been put out, so you don't gain that much of an advantage by sitting on a very low latency connection. Sure you do, you're still first in whatever line there is; latency still matters no matter how much you try and slow execution speed down. Latency isn't about the speed of trading, it's about being first in line regardless (speed to the sales counter) of what speed the trades are limited to.

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.
- kbenson 11y ago
  > 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. Well, I think the problem is less that the book is a line and it's not fair (the definition of fair would change in this system, it would be fair that you had the same chance as everyone else in that time frame), but more that you open yourself up to different problems, such as the larger players being able to split their orders up in to many smaller orders, to increase they chance a large percentage of their orders will go through before any supply has dried up. There's actually another industry that has to deal with these problems, and especially with pecieved fairness. Online event ticketing. Ticketmaster runs a queue. AXS runs a randomized pool. Both are gamed. Interestingly, I think some brokers actually do colocate close to TM servers, which makes the parallel fairly obvious.
  - eru 11y ago
    Online event ticketing could get rid of scalping completely, by auctioning off the tickets, if there's excess demand.
    - kbenson 11y ago
      That wouldn't eliminate the problem. Demand changes over time, and supply is fixed. There are quite a few ways to invest in tickets. One is to buy all the tickets on an event that is expected to sellout immediately. Another is to find an event that you expect to sellout at some time before the event that will allow enough time for demand to build, and you buy tickets before it sells out. In the end, ticket prices change over time, therefore there will be a market. Even if the primary seller (e.g. TicketMaster) raises prices, if you bought at a time when they were cheaper, you can resell at a profit. Event ticketing is a market, and as such there will be people that want to invest (even if it's just fans who intended to go and then decided they couldn't, or the money they could get for the tickets is too much to pass up). Scalpers (brokers) provide a service, liquidity. Often they go too far, and use technology to get tickets in unethical ways (ignoring site policies, bypassing captchas, using software to tie up thousands of tickets they have no intention of buying, etc). But the fact that they continue to exist is because there is demand (and now TicketMaster is in on the game as well, their TM+ service allows you to resell tickets on their site along-side their own, unsold tickets).

tomjen3 11y ago

The minimum spread isn't a fixed quantity, different traders will have different minimums. Right now there is a price floor, below which the price cannot fall, which is bad for all those who want to transact in the stock market. As for the speed race, why not limit transactions so that they can only be executed on the dot, once every $TIME_STEP? You won't be able to see what orders others have been put out, so you don't gain that much of an advantage by sitting on a very low latency connection.

mrchicity 11y ago
This is correct. In ultra-liquid stocks, with a finer tick increment, natural buyers and sellers could undercut the market-makers' spreads since they aren't concerned about making short-term profits. Market-makers could also compete with more diverse pricing. It is not necessarily a bad thing to have a price floor. Removing the floor is a good thing for the parties that meet at the tighter spread, but there is an externality where somebody who wants the shares nearly as much has their order go unexecuted despite providing price discovery to the market by showing their order. Look at GOOGL for example. It is $700 with a $0.01 price increment. Somebody can jump in front of your order by paying just 0.0014% more, there is little incentive to show limit orders on the market, which this makes the order book very thin. There is probably a better balance where the tick is large enough to avoid people jumping your order, but small enough that traders can compete: https://www.sec.gov/comments/4-657/4657-40.pdf https://www.sec.gov/comments/4-657/4657-40.pdf has more comments on these effects. You can trade in a single price auction in almost every market worldwide. A large amount of volume in US equities trades in this way, so people already have this option, but many choose not to use it.
gnaritas 11y ago
> As for the speed race, why not limit transactions so that they can only be executed on the dot, once every $TIME_STEP? You won't be able to see what orders others have been put out, so you don't gain that much of an advantage by sitting on a very low latency connection. Sure you do, you're still first in whatever line there is; latency still matters no matter how much you try and slow execution speed down. Latency isn't about the speed of trading, it's about being first in line regardless (speed to the sales counter) of what speed the trades are limited to.