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That's why market makers are also called scalpers, because they skim the $0.10 spread. But in return for paying the spread, what traders get is immediacy. The
by cdetrio 11y ago
That's why market makers are also called scalpers, because they skim the $0.10 spread. But in return for paying the spread, what traders get is immediacy.
The problem is, how much immediacy do traders actually want? HFT provides immediacy in microseconds; its needed for continuous-time auctions because buyers sellers usually aren't in the market at the exact same microsecond interval (while the HFT is there at every interval).
Frequent Batch Auctions[1], where orders are matched in batches with single-price clearing (call auction style) - just like the opening and closing sessions of NYSE, but much more frequently with shorter periods of say 30 seconds, 1 second, or even 100ms per batch. Their models show that frequent batch auctions will reduce spreads even further (because it eliminates mechanical/latency arbitrage rents). In theory, retail traders should get even better prices (because the spreads will be smaller) if they are willing to give up microsecond immediacy for 1 second order matching.
http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions-Slides.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...
- kasey_junk 11y agoCurrent continuous-time trading already provides you the ability to specify very precisely how much immediacy you are willing to pay for. Thats precisely what the market types are about. I don't particularly have an opinion about the Budish paper, other than it has some serious impacts to globally traded products and it is way more disruptive than people seem to suggest. I do worry that fundamentally altering the way the markets work, because some participants don't understand order types is particularly troublesome.
- cdetrio 11y agoSimplish order types (limit/market, good till cancel, immediate or cancel, etc.) can only do so much. When you place a limit order on a continuous-time market, you'll pay exactly your limit price; but on a batch market you'll pay the clearing price (which may be less than your limit price). The complicated types (hide-n-slide, NBBO pegs, and conditional pegs[1]) may help some players at the expense of others. The only players who wouldn't benefit from batch auctions (according to Budish et. al.) are latency arbitrageurs. 1. https://mechanicalmarkets.wordpress.com/2015/10/05/iex-peg-orders-last-look-for-equity-markets/ https://mechanicalmarkets.wordpress.com/2015/10/05/iex-peg-o...
- kasey_junk 11y ago> you'll pay exactly your limit price Thats not quite true. Price improvement happens all the time on limit orders, but I'll concede you'll pay close to it if it fills. > The complicated types (hide-n-slide, NBBO pegs, and conditional pegs[1]) may help some players at the expense of others. This is true of limit/market/stops as well. The Budish paper is very interesting. What we don't know is what it would do to the spread, which is very important especially given that it will be harder to predict the clearing price. It is also a major change to the markets, virtually impossible to implement and its not clear to me what that risk is buying us, especially given that I fully expect most participants to go through an intermediate first.
- tptacek 11y agoWhat are some circumstances in which you'd get price improvement on a resting limit order?
- kasey_junk 11y agoYou wouldn't on a resting order, but if you hit the other side you will.