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What's your opinion on frequent batch auctions as outlined by Eric Budish ( http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf h

by jcfrei 9y ago

What's your opinion on frequent batch auctions as outlined by Eric Budish ( http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre... )? He has some strong arguments against continuous time limit order books.

mrchicity 9y ago
I think the continuous price/time priority limit order book is flawed, but the least bad option out there, similar to democracy. Speed will still matter in batch auctions if other continuous exchanges trade correlated products--the only way to prevent that is to force all trading to happen worldwide on the batch auction exchange, leading to monopoly rents for the exchange operator. Is it better to have high fees without arbitrage than extremely low fees and tiny arbitrages where fast traders are netting fractions of a basis point? It's not clear to me. Also lots of liquidity in ETFs and other derivative products is provided based on being able to hedge quickly in other tickers with high probability. If I'm making a market in XLF (S&P Financials ETF), but my orders to hedge in BAC, GS, MS, C, ... all get held up in a batch auction, that's extra risk. I can't make a tight spread, large size market in the ETF since the price of the basket components can drift away after I get a fill. Budish also argues that arbitrages aren't competed away. It's true that arbitrageurs will never eliminate arbitrages, only make them last for shorter periods of time. However, natural market participants can change their behavior to eliminate them, and they have. If everyone trading S&P 500 futures also traded SPY with orders that arrived simultaneously, fewer arbitrages would exist to be exploited. You don't even need to be fast to do this, just precise with timing. This kind of routing is very common in equities markets and it's a big part of why many early HFT scalping models no longer work regardless of how fast you are.
mhurd 9y ago
Frequent batch auctions may lead to unintended consequences. You end up with a deadline and there are information arbitrages and latency games in playing as close as possible to the deadline. Markets don't exist in isolation as the real world really does exist in the real world.

by jcfrei 9y ago

mrchicity 9y ago

I think the continuous price/time priority limit order book is flawed, but the least bad option out there, similar to democracy. Speed will still matter in batch auctions if other continuous exchanges trade correlated products--the only way to prevent that is to force all trading to happen worldwide on the batch auction exchange, leading to monopoly rents for the exchange operator. Is it better to have high fees without arbitrage than extremely low fees and tiny arbitrages where fast traders are netting fractions of a basis point? It's not clear to me. Also lots of liquidity in ETFs and other derivative products is provided based on being able to hedge quickly in other tickers with high probability. If I'm making a market in XLF (S&P Financials ETF), but my orders to hedge in BAC, GS, MS, C, ... all get held up in a batch auction, that's extra risk. I can't make a tight spread, large size market in the ETF since the price of the basket components can drift away after I get a fill. Budish also argues that arbitrages aren't competed away. It's true that arbitrageurs will never eliminate arbitrages, only make them last for shorter periods of time. However, natural market participants can change their behavior to eliminate them, and they have. If everyone trading S&P 500 futures also traded SPY with orders that arrived simultaneously, fewer arbitrages would exist to be exploited. You don't even need to be fast to do this, just precise with timing. This kind of routing is very common in equities markets and it's a big part of why many early HFT scalping models no longer work regardless of how fast you are.

mhurd 9y ago

Frequent batch auctions may lead to unintended consequences. You end up with a deadline and there are information arbitrages and latency games in playing as close as possible to the deadline. Markets don't exist in isolation as the real world really does exist in the real world.