6 ms·

Somethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos? That seems like a lot of co

Somethings off. If all this is is market making, why all the trouble with the microsecond latencies? Microwave links? Shared colos? That seems like a lot of cost everyone could save on by simply having the exchange enforce some minimum timings.

tptacek 11y ago
Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them. There are two straightforward problems with microsecond-speed electronic trading: * At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making. * Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview. To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.
- revelation 11y ago
  That's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules. I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.
  - harryh 11y ago
    You don't actually have 10ms to act in the scenario you describe. Because there is new information entering the world at all times, you would want to wait until the last possible microsecond before the end of the 10ms window before entering any bids. The window does nothing to remove the need for speed. The world is a continuous system. No matter how hard you try you can't force it to be discrete. (There are other problems in your proposed scenario to having to do with mismatched buy vs sell volume, but we'll ignore those for now.)
    - true_religion 11y ago
      What new information? I think the above poster meant to imply that the 10ms delay would cover all market transactions, so if you put in an order now, then no one knows it till the next 10ms stop post. Essentially its buffering all the data then releasing it at once, so it's not a truly continuous system anymore.
      - harryh 11y ago
        > What new information? Stuff that happens in the real world. The stuff that all security prices are eventually based on. It's not a closed system you know?
        true_religion 11y ago
        Ah, that's why I wanted an example. Your answer is fairly obvious, but it's pretty absolute too so there's no way to ask questions like "is this information actually going to affect the bid size or price of a bidder?" or "is this event important but infrequent, like quarterly reporting?" For example, infrequent important events will result in a race for people to submit at the last microsecond, but because they're infrequent 99% of the time the 10ms buffering will effectively change the behaviour of market participants.
        mrchicity 11y ago
- mentat 11y ago
  Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. HFTs are able to make money on fees by having special access not only in terms of latency but in terms of ordering.
  - kasey_junk 11y ago
    All public exchanges are required to have public approval for all of their order types and you can look up how they behave at any time.
  - chollida1 11y ago
    > Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. What exactly is an "Exotic quote type"? Do you mean order type because there is a huge difference. If you don't understand the difference it makes it hard to take your assertion seriously.
- neffy 11y ago
  The fundamental issue is Fisher consensus - arbitrage is a feature in other words.
kasey_junk 11y ago
A couple of things: 1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others. 2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC). 3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because... 4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.
- nanexllc 11y ago
  It is a common fallacy that retail orders ever go to stock exchanges. This is a good way to determine someone telling the truth. Here's proof: http://www.nanex.net/aqck2/4704.html http://www.nanex.net/aqck2/4704.html
usefulcat 11y ago
If you're doing market making, note that you're more likely to get a buy order filled when the market is going down, and more likely to get a sell order filled when the market is going up. This is the flip side of getting to "capture the spread". So in order to be successful, especially when your margins are razor thin (and they pretty much always are), you have to be very, very good at canceling your orders as quickly as possible any time it looks like the market is likely to move against you.

tptacek 11y ago

Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them. There are two straightforward problems with microsecond-speed electronic trading: * At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making. * Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview. To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.

revelation 11y ago
That's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules. I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.
- harryh 11y ago
  You don't actually have 10ms to act in the scenario you describe. Because there is new information entering the world at all times, you would want to wait until the last possible microsecond before the end of the 10ms window before entering any bids. The window does nothing to remove the need for speed. The world is a continuous system. No matter how hard you try you can't force it to be discrete. (There are other problems in your proposed scenario to having to do with mismatched buy vs sell volume, but we'll ignore those for now.)
  - true_religion 11y ago
    What new information? I think the above poster meant to imply that the 10ms delay would cover all market transactions, so if you put in an order now, then no one knows it till the next 10ms stop post. Essentially its buffering all the data then releasing it at once, so it's not a truly continuous system anymore.
    - harryh 11y ago
      > What new information? Stuff that happens in the real world. The stuff that all security prices are eventually based on. It's not a closed system you know?
      - true_religion 11y ago
        Ah, that's why I wanted an example. Your answer is fairly obvious, but it's pretty absolute too so there's no way to ask questions like "is this information actually going to affect the bid size or price of a bidder?" or "is this event important but infrequent, like quarterly reporting?" For example, infrequent important events will result in a race for people to submit at the last microsecond, but because they're infrequent 99% of the time the 10ms buffering will effectively change the behaviour of market participants.
        mrchicity 11y ago
mentat 11y ago
Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. HFTs are able to make money on fees by having special access not only in terms of latency but in terms of ordering.
- kasey_junk 11y ago
  All public exchanges are required to have public approval for all of their order types and you can look up how they behave at any time.
- chollida1 11y ago
  > Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. What exactly is an "Exotic quote type"? Do you mean order type because there is a huge difference. If you don't understand the difference it makes it hard to take your assertion seriously.
neffy 11y ago
The fundamental issue is Fisher consensus - arbitrage is a feature in other words.

kasey_junk 11y ago

A couple of things: 1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others. 2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC). 3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because... 4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.

nanexllc 11y ago
It is a common fallacy that retail orders ever go to stock exchanges. This is a good way to determine someone telling the truth. Here's proof: http://www.nanex.net/aqck2/4704.html http://www.nanex.net/aqck2/4704.html

usefulcat 11y ago

If you're doing market making, note that you're more likely to get a buy order filled when the market is going down, and more likely to get a sell order filled when the market is going up. This is the flip side of getting to "capture the spread". So in order to be successful, especially when your margins are razor thin (and they pretty much always are), you have to be very, very good at canceling your orders as quickly as possible any time it looks like the market is likely to move against you.