5 ms·

Forget adding speed bumps, frequent batch auctions are the way to go. Group orders every second and match trades (and maybe give priority based on volume). Ther

Forget adding speed bumps, frequent batch auctions are the way to go. Group orders every second and match trades (and maybe give priority based on volume). There is no reason any company or trader cannot commit to price for 1s and it completely eliminates high frequency shenanigans.

sseveran 11y ago
You do realize that there are discreet intraday crosses already right?
- CyberDildonics 11y ago
  What does that have to do with what you responded to?
  - sseveran 11y ago
    He is describing a discreet intraday cross. For traders who prefer to use them they already exist.
kasey_junk 11y ago
Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. There isn't "a market" there are lots of little ones, geographically dispersed and across jurisdictions. Further, there are already pro-rata matching engines, and they also have "high frequency shenanigans". In fact, they actually can encourage more gaming as you have to put in more quantity than you want, so you have to do something else to manage your risk.
- bobcostas55 11y ago
  >Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. I find this extremely difficult to believe, got any numbers to back it up? Surely the vast majority of the volume comes from market making activity...
  - kasey_junk 11y ago
    I suppose it depends on what your definition of shenanigans is. In the context of IEX & their artificial delay that is purely to deal with cross exchange trading. Most of which is market making activity.
- cdetrio 11y ago
  Batch auctions do defeat cross-exchange arbitrage. I went into some detail about this here: http://cdetr.io/smart-markets/ http://cdetr.io/smart-markets/ [excerpt from Section 2.1 Batch auctions and mechanical arbitrage] > ... batch processing with uniform-price clearing eliminates mechanical arbitrage opportunities. To be clear, if only the local market utilizes batch processing with uniform-price clearing, and the external market utilizes conventional serial processing and discriminatory pricing, then there will still be arbitrage opportunities in the external market. That is, the fastest traders can still profit by propagating prices from the local market outward to the external market. But arbitrage opportunities in the other direction, from the external market into the local market, are eliminated.
GauntletWizard 11y ago
I agree completely. Delayed 'ticks' are the way popular RTS games handle latency [1], and yet it doesn't hamper the high-level players from needing very quick reaction times and strategy. In the HFT world, it might require a rethinking of strategy, and honestly some 'thinking turns ahead', but I don't see that as a bad thing. [1] http://www.gamasutra.com/view/feature/131503/1500_archers_on_a_288_network_.php http://www.gamasutra.com/view/feature/131503/1500_archers_on...
fragsworth 11y ago
It shifts the problem so that every bot is waiting for the end of each second to gather as much information as possible from external sources before placing its orders. So when a human trader places a market order, they will have a disadvantage equal to the volatility over 1 second. By contrast, in a real-time market, the HFT bots make your market orders very close to the current price everywhere else. It's not clear to me that batching actually solves all our problems. It might be better, but it doesn't seem 100% clear cut.
- mkehrt 11y ago
  Maybe randomly pick an auction length from like 0.5 to 1.5 seconds each time, so you don't know what batch you're in?
  - unabridged 11y ago
    There is currently a dark pool using a similar method: "The London Stock Exchange’s Turquoise Midpoint Dark Pool has a service known as Uncross, which matches orders at the midpoint of the bid and offer with auctions held randomly every 5 to 10 seconds." https://blogs.cfainstitute.org/marketintegrity/2014/11/10/are-frequent-batch-auctions-a-solution-to-hft-latency-arbitrage/ https://blogs.cfainstitute.org/marketintegrity/2014/11/10/ar...
    - gd1 11y ago
      Which is kind of the point. If people think that rolling auctions are better than a CLOB, they are free to set up exchanges that use auctions and see if anybody trades on them. Spoiler: No one will. Or are they arguing that the government should step in and tell people how to trade?
- unabridged 11y ago
  Yes, in the case where external pricing information is released a short time before the window closes, collocated HFT will be able to win. But I'm not sure it would be any worse than the current situation. Also with batch auctions there can be multiple collocation points in different cities. But when the external information is released earlier in the window (which should be just as likely if random, and maybe even mandated for press releases to occur at the beginning of the window) the playing field between collocated HFT and smaller traders is much more level than the current situation. But most information used in trading isn't from external sources, its from the order book itself. Collocated HFT with 1ms latency can read the book, calculate next move (let's say 20ms), and submit new order in 1 + 20 + 1 = 22ms. A trader with 100ms latency and the same system would take 220ms to respond. This is where most of the HFT advantage comes from, they can see the order book and respond before it even arrives at your computer. With a batch auction everyone sees the previous results at the beginning of the window and has 1s to respond. Low latency is still desirable to allow for more processing, but its no longer overpowered. edit: 1 sec was chosen completely arbitrarily, the best choice could be more or less, or even a random sized window.
jackschultz 11y ago
Relevant papers for frequent batch auctions. To me, seems like such a hurdle to get politicians to understand what frequent batch auctions are, and how they would help the HFT situation. Especially if the introduction paper is 84 pages long. Introduction and reasoning: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Implementation details: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions-ImplementationDetails.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Both interesting reads though. We actually implemented batch auctions as a way to set initial prices for our prediction markets at Inkling Markets (http://home.inklingmarkets.com/ http://home.inklingmarkets.com/) based off these papers.
- kasey_junk 11y ago
  Those are really good papers & I highly recommend them. A couple of things I've always wondered about them: - their proposal seems to require either coordinated legal regimes & consistent global clocks or a monopoly exchange, both of which on the surface seem impossible. - their matching algorithm both still has a time priority component as well as a random or pro rata component, which is problematic. - finally, the main complaint seems to be with the profitability of the arb not decreasing, but isn't that a direct function of the legislated price floor imposed on the markets?
  - cdetrio 11y ago
    Global clocks aren't required, as batch intervals on different exchanges don't need to be synchronized. Although the batch interval is a window of cross-exchange risk, the uniform-price clearing means it is still more efficient (in "volume-space"). Continuous auctions have really short risk windows (more efficient in "time-space"), but the discriminatory pay-as-bid price clearing means that all that risk is shouldered by everyone but the fastest traders (who are thus able to extract arbitrage rents from the slower traders).
- cdetrio 11y ago
  The authors have apparently been giving presentations to various politicians/regulators, using an excellent set of slides: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions-Slides.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...
Gustomaximus 11y ago
I really like this. A goal of a stockmarket should (among other things) be to create a level playing field for investor. This would really help this and offer no negative incentive to a true investor.

sseveran 11y ago

You do realize that there are discreet intraday crosses already right?

CyberDildonics 11y ago
What does that have to do with what you responded to?
- sseveran 11y ago
  He is describing a discreet intraday cross. For traders who prefer to use them they already exist.

kasey_junk 11y ago

Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. There isn't "a market" there are lots of little ones, geographically dispersed and across jurisdictions. Further, there are already pro-rata matching engines, and they also have "high frequency shenanigans". In fact, they actually can encourage more gaming as you have to put in more quantity than you want, so you have to do something else to manage your risk.

bobcostas55 11y ago
>Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. I find this extremely difficult to believe, got any numbers to back it up? Surely the vast majority of the volume comes from market making activity...
- kasey_junk 11y ago
  I suppose it depends on what your definition of shenanigans is. In the context of IEX & their artificial delay that is purely to deal with cross exchange trading. Most of which is market making activity.
cdetrio 11y ago
Batch auctions do defeat cross-exchange arbitrage. I went into some detail about this here: http://cdetr.io/smart-markets/ http://cdetr.io/smart-markets/ [excerpt from Section 2.1 Batch auctions and mechanical arbitrage] > ... batch processing with uniform-price clearing eliminates mechanical arbitrage opportunities. To be clear, if only the local market utilizes batch processing with uniform-price clearing, and the external market utilizes conventional serial processing and discriminatory pricing, then there will still be arbitrage opportunities in the external market. That is, the fastest traders can still profit by propagating prices from the local market outward to the external market. But arbitrage opportunities in the other direction, from the external market into the local market, are eliminated.

GauntletWizard 11y ago

I agree completely. Delayed 'ticks' are the way popular RTS games handle latency [1], and yet it doesn't hamper the high-level players from needing very quick reaction times and strategy. In the HFT world, it might require a rethinking of strategy, and honestly some 'thinking turns ahead', but I don't see that as a bad thing. [1] http://www.gamasutra.com/view/feature/131503/1500_archers_on_a_288_network_.php http://www.gamasutra.com/view/feature/131503/1500_archers_on...

fragsworth 11y ago

It shifts the problem so that every bot is waiting for the end of each second to gather as much information as possible from external sources before placing its orders. So when a human trader places a market order, they will have a disadvantage equal to the volatility over 1 second. By contrast, in a real-time market, the HFT bots make your market orders very close to the current price everywhere else. It's not clear to me that batching actually solves all our problems. It might be better, but it doesn't seem 100% clear cut.

mkehrt 11y ago
Maybe randomly pick an auction length from like 0.5 to 1.5 seconds each time, so you don't know what batch you're in?
- unabridged 11y ago
  There is currently a dark pool using a similar method: "The London Stock Exchange’s Turquoise Midpoint Dark Pool has a service known as Uncross, which matches orders at the midpoint of the bid and offer with auctions held randomly every 5 to 10 seconds." https://blogs.cfainstitute.org/marketintegrity/2014/11/10/are-frequent-batch-auctions-a-solution-to-hft-latency-arbitrage/ https://blogs.cfainstitute.org/marketintegrity/2014/11/10/ar...
  - gd1 11y ago
    Which is kind of the point. If people think that rolling auctions are better than a CLOB, they are free to set up exchanges that use auctions and see if anybody trades on them. Spoiler: No one will. Or are they arguing that the government should step in and tell people how to trade?
unabridged 11y ago
Yes, in the case where external pricing information is released a short time before the window closes, collocated HFT will be able to win. But I'm not sure it would be any worse than the current situation. Also with batch auctions there can be multiple collocation points in different cities. But when the external information is released earlier in the window (which should be just as likely if random, and maybe even mandated for press releases to occur at the beginning of the window) the playing field between collocated HFT and smaller traders is much more level than the current situation. But most information used in trading isn't from external sources, its from the order book itself. Collocated HFT with 1ms latency can read the book, calculate next move (let's say 20ms), and submit new order in 1 + 20 + 1 = 22ms. A trader with 100ms latency and the same system would take 220ms to respond. This is where most of the HFT advantage comes from, they can see the order book and respond before it even arrives at your computer. With a batch auction everyone sees the previous results at the beginning of the window and has 1s to respond. Low latency is still desirable to allow for more processing, but its no longer overpowered. edit: 1 sec was chosen completely arbitrarily, the best choice could be more or less, or even a random sized window.

jackschultz 11y ago

Relevant papers for frequent batch auctions. To me, seems like such a hurdle to get politicians to understand what frequent batch auctions are, and how they would help the HFT situation. Especially if the introduction paper is 84 pages long. Introduction and reasoning: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Implementation details: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions-ImplementationDetails.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... Both interesting reads though. We actually implemented batch auctions as a way to set initial prices for our prediction markets at Inkling Markets (http://home.inklingmarkets.com/ http://home.inklingmarkets.com/) based off these papers.

kasey_junk 11y ago
Those are really good papers & I highly recommend them. A couple of things I've always wondered about them: - their proposal seems to require either coordinated legal regimes & consistent global clocks or a monopoly exchange, both of which on the surface seem impossible. - their matching algorithm both still has a time priority component as well as a random or pro rata component, which is problematic. - finally, the main complaint seems to be with the profitability of the arb not decreasing, but isn't that a direct function of the legislated price floor imposed on the markets?
- cdetrio 11y ago
  Global clocks aren't required, as batch intervals on different exchanges don't need to be synchronized. Although the batch interval is a window of cross-exchange risk, the uniform-price clearing means it is still more efficient (in "volume-space"). Continuous auctions have really short risk windows (more efficient in "time-space"), but the discriminatory pay-as-bid price clearing means that all that risk is shouldered by everyone but the fastest traders (who are thus able to extract arbitrage rents from the slower traders).
cdetrio 11y ago
The authors have apparently been giving presentations to various politicians/regulators, using an excellent set of slides: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions-Slides.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...

Gustomaximus 11y ago

I really like this. A goal of a stockmarket should (among other things) be to create a level playing field for investor. This would really help this and offer no negative incentive to a true investor.