5 ms·

> You can absolutely stop trading with CaveBob! You can do this, as I said, by "placing a limit order that doesn't cross the spread." So if Bob is selling $STOC

by ced 11y ago

> You can absolutely stop trading with CaveBob! You can do this, as I said, by "placing a limit order that doesn't cross the spread." So if Bob is selling $STOCK for $10, and buying for $9.95 and you want to buy you can place a limit order to buy for $9.95. CaveBob won't sell to you at that price but maybe someone else will come along later to take it from you. Does that solve the issue? Suppose that I'm usually selling meat at 10$/kilo, but the buying side is at 9.50. Then when there's a catastrophe (some other vendor burned down), I could sell them at a higher price, 20$/kilo. If the news reach the HFT 1 millisecond before it reaches me, they can buy it at 10$ from me, then sell it at 20$/kilo for a big profit, but I would much rather have sold it at 20$/kilo myself. Is there any limit order that prevents that?

harryh 11y ago
No. If you put in an order you're willing to sell at $10 (unless you notice the news about the catastrophe and cancel your order fast enough)[1], you're selling at $10. But if, instead, you just take the market price (as provided by the market maker) whenever you want to sell then as soon as the information enters the market you'll end up selling at $20 (or $19.95 or whatever). This is one of the other services that you are paying the market maker for: price discovery. If you want you can do this job on your own. You can expend a lot of effort to keep up with all the latest news so you know what price you should be selling at. Or you can let market makers all compete to buy from you at the best price taking into account all of the latest information. In your meat example, keep in mind that there isn't just one trader who will buy from you for $10 to sell at $20. They're all competing to buy from you for the best possible price so they will very very quickly bid the price up to something very very close to $20. This is why most people love market makers! If you trade with them you can be assured that you are (more or less) getting the best possible price taking into account all of the latest information. Going back to your comic, this is what's happening in frame two. The ship arriving (for some unclear reason) is changing the price of neckerchiefs. It's generally to everyone's benefit if this new information enters the market as fast as possible. Rather than thinking something shady is going on we should think this is great, and feel good about paying them a few pennies to keep the information flowing quickly. [1] Which is the exact same risk liquidity sellers normally take! This is why, in flash boys, Brad Katsuyama sees the price move when he tries to make a large trade. All the people selling liquidity are worried that there is some new piece of information they don't know about yet so they move their prices so they don't get run over. This is why you sometimes see complaints that so many orders from HFT traders are cancelled. They're constantly monitoring all kinds of news sources so that they can keep their prices accurate. The fact that they're cancelling orders isn't a sign of shadiness, it's just a sign that prices are moving.
- ced 11y ago
  > Or you can let market makers all compete to buy from you at the best price taking into account all of the latest information. In your meat example, keep in mind that there isn't just one trader who will buy from you for $10 to sell at $20. They're all competing to buy from you for the best possible price so they will very very quickly bid the price up to something very very close to $20. If I put a market order to sell meat at the market price of 10$ at 10AM (because I just produced a bunch more), then the first HFT to get the news of the catastrophe at 10AM + 1 microsecond will buy them from me at that price, but if I had gotten the news at the same time as they did, I would have withdrawn my market order and refused to trade at 10$. Maybe HFTs/market makers serve many different purposes and we're talking past each other. I agree with the liquidity argument, to the extent that I understand it. Is getting the news slightly faster really providing value? > You can expend a lot of effort to keep up with all the latest news. The news that my competitors burned down doesn't require a lot of effort to keep up with in the age of the Internet, but it does require large amounts of capital to get it 1 microsecond before everybody else. If trades were only allowed every 60 seconds like the comic suggests, to allow everyone time to process the news, what value would be lost? Should society rejoice when an HFT gets 10% closer to the speed of light?
  - harryh 11y ago
    > If I put a market order to sell meat at the market price of 10$ at 10AM Yes, at 10AM (before news happens) you can take the $10 price. And, unfortunately for you, the world might change 1 microsecond later. And it sounds bad when you say "1 microsecond" but what if you say "5 minutes" or "1 hour" or "1 day"? You're probably going to feel just as bad about missing out on a better price even if the timescale is a human one instead of an electronic one. There is no way to avoid this. The world can change after your sell your meat. It might change 1 microsecond later or it might change a week later. You chose to sell when you chose to sell. You can't say oopsies and complain if the world changes after you made your decision. The fact that the world can change after you make your trade has absolutely nothing to do with high speed trading. Very high speed price discovery actually works in your favor here! At least the price jumps to $20 really really fast after the news now. Without computers it might take 5 or 10 minutes (or whatever). The sooner the news is incorporated the smaller the time window in which you can accidentally screw yourself. While thinking about this, keep in mind also that the price might drop (maybe there is a bumper crop of cows). If you sold now for $10 but then the price dropped to $5 you'd feel great. When you sell now you're taking the risk of a price change (in either direction) off the table. You can't on one hand, avoid a price drop, but on the other hand think that you should get the benefits of a price rise. > the first HFT to get the news of the catastrophe at 10AM + 1 microsecond will buy them from me at that price, This is actually wrong and not what happens. The trade you're talking about happened at 10AM (before the news). You put in a market order which means "take whatever price is being offered right now." not "put my meat out for sale and wait for someone else to trade with me." So no trade is happening at 10AM + 1 microsecond (after the news). > If trades were only allowed every 60 seconds like the comic suggests Ah yes. Everyone eventually hits on this idea, but it doesn't work. What happens if, at a given price, the # of buyers and sellers doesn't match up at the time you want to execute all the trades? 1. Execute the trades that put in their orders first. Well then you're back to where you were before. 2. Execute some % (less than 100%) of one side of the trades so that everything matches up. But then you create a very unstable situation. If I think that maybe only 50% of the trades are going to execute you've incentivized me to say I want to trade 2x of what I really want to trade. But wait, everyone else is also thinking the same thing. So maybe 4x? Repeat ad nauseam. This is a very unstable game-theory heavy sort of situation that's actually pretty dangerous. And really even if you do this you haven't removed the need for high speed computers & communication. Lets say that a block closes at precisely noon. I definitely don't want to input my trade at 11:59:01. What if there is news in the next 59 seconds? I really want to wait until the last possible microsecond to input my trades for the block right? So...we're back to where we were before anyways. The real world is continuous. It's not really possible to make markets based on the real world operate discretely.

by ced 11y ago

harryh 11y ago

No. If you put in an order you're willing to sell at $10 (unless you notice the news about the catastrophe and cancel your order fast enough)[1], you're selling at $10. But if, instead, you just take the market price (as provided by the market maker) whenever you want to sell then as soon as the information enters the market you'll end up selling at $20 (or $19.95 or whatever). This is one of the other services that you are paying the market maker for: price discovery. If you want you can do this job on your own. You can expend a lot of effort to keep up with all the latest news so you know what price you should be selling at. Or you can let market makers all compete to buy from you at the best price taking into account all of the latest information. In your meat example, keep in mind that there isn't just one trader who will buy from you for $10 to sell at $20. They're all competing to buy from you for the best possible price so they will very very quickly bid the price up to something very very close to $20. This is why most people love market makers! If you trade with them you can be assured that you are (more or less) getting the best possible price taking into account all of the latest information. Going back to your comic, this is what's happening in frame two. The ship arriving (for some unclear reason) is changing the price of neckerchiefs. It's generally to everyone's benefit if this new information enters the market as fast as possible. Rather than thinking something shady is going on we should think this is great, and feel good about paying them a few pennies to keep the information flowing quickly. [1] Which is the exact same risk liquidity sellers normally take! This is why, in flash boys, Brad Katsuyama sees the price move when he tries to make a large trade. All the people selling liquidity are worried that there is some new piece of information they don't know about yet so they move their prices so they don't get run over. This is why you sometimes see complaints that so many orders from HFT traders are cancelled. They're constantly monitoring all kinds of news sources so that they can keep their prices accurate. The fact that they're cancelling orders isn't a sign of shadiness, it's just a sign that prices are moving.

ced 11y ago
> Or you can let market makers all compete to buy from you at the best price taking into account all of the latest information. In your meat example, keep in mind that there isn't just one trader who will buy from you for $10 to sell at $20. They're all competing to buy from you for the best possible price so they will very very quickly bid the price up to something very very close to $20. If I put a market order to sell meat at the market price of 10$ at 10AM (because I just produced a bunch more), then the first HFT to get the news of the catastrophe at 10AM + 1 microsecond will buy them from me at that price, but if I had gotten the news at the same time as they did, I would have withdrawn my market order and refused to trade at 10$. Maybe HFTs/market makers serve many different purposes and we're talking past each other. I agree with the liquidity argument, to the extent that I understand it. Is getting the news slightly faster really providing value? > You can expend a lot of effort to keep up with all the latest news. The news that my competitors burned down doesn't require a lot of effort to keep up with in the age of the Internet, but it does require large amounts of capital to get it 1 microsecond before everybody else. If trades were only allowed every 60 seconds like the comic suggests, to allow everyone time to process the news, what value would be lost? Should society rejoice when an HFT gets 10% closer to the speed of light?
- harryh 11y ago
  > If I put a market order to sell meat at the market price of 10$ at 10AM Yes, at 10AM (before news happens) you can take the $10 price. And, unfortunately for you, the world might change 1 microsecond later. And it sounds bad when you say "1 microsecond" but what if you say "5 minutes" or "1 hour" or "1 day"? You're probably going to feel just as bad about missing out on a better price even if the timescale is a human one instead of an electronic one. There is no way to avoid this. The world can change after your sell your meat. It might change 1 microsecond later or it might change a week later. You chose to sell when you chose to sell. You can't say oopsies and complain if the world changes after you made your decision. The fact that the world can change after you make your trade has absolutely nothing to do with high speed trading. Very high speed price discovery actually works in your favor here! At least the price jumps to $20 really really fast after the news now. Without computers it might take 5 or 10 minutes (or whatever). The sooner the news is incorporated the smaller the time window in which you can accidentally screw yourself. While thinking about this, keep in mind also that the price might drop (maybe there is a bumper crop of cows). If you sold now for $10 but then the price dropped to $5 you'd feel great. When you sell now you're taking the risk of a price change (in either direction) off the table. You can't on one hand, avoid a price drop, but on the other hand think that you should get the benefits of a price rise. > the first HFT to get the news of the catastrophe at 10AM + 1 microsecond will buy them from me at that price, This is actually wrong and not what happens. The trade you're talking about happened at 10AM (before the news). You put in a market order which means "take whatever price is being offered right now." not "put my meat out for sale and wait for someone else to trade with me." So no trade is happening at 10AM + 1 microsecond (after the news). > If trades were only allowed every 60 seconds like the comic suggests Ah yes. Everyone eventually hits on this idea, but it doesn't work. What happens if, at a given price, the # of buyers and sellers doesn't match up at the time you want to execute all the trades? 1. Execute the trades that put in their orders first. Well then you're back to where you were before. 2. Execute some % (less than 100%) of one side of the trades so that everything matches up. But then you create a very unstable situation. If I think that maybe only 50% of the trades are going to execute you've incentivized me to say I want to trade 2x of what I really want to trade. But wait, everyone else is also thinking the same thing. So maybe 4x? Repeat ad nauseam. This is a very unstable game-theory heavy sort of situation that's actually pretty dangerous. And really even if you do this you haven't removed the need for high speed computers & communication. Lets say that a block closes at precisely noon. I definitely don't want to input my trade at 11:59:01. What if there is news in the next 59 seconds? I really want to wait until the last possible microsecond to input my trades for the block right? So...we're back to where we were before anyways. The real world is continuous. It's not really possible to make markets based on the real world operate discretely.