19 ms·

"So-called high frequency trading firms place trades in a fraction of a second, sometimes in a bet that they can move faster than bigger competitors." First of

"So-called high frequency trading firms place trades in a fraction of a second, sometimes in a bet that they can move faster than bigger competitors." First off: no. Big money plays in high frequency trading (roughly half of all trading activity), and the smaller traders without instantaneous access are the losers in this game. Secondly, NASDAQ's obsession with precise global sequencing is A) misguided and B) effectively impossible to do right 100% of the time. Given this, I would argue that the appropriate thing to do is change the market requirements. And I'd argue that like this: 1) Temporally quantize the market. Orders come in on an open temporal window that is sufficiently long to account for global latency of non-pathological communication (sorry, tor users) and a bit of computation time. Everyone gets to swim in the same pool. Maybe one second, maybe more. Nobody gets to see the order book until it's resolved. Write-only. 2) Lock the book and fulfill orders from the set of satisfiable orders. If there just contention for a trade (there will always be some), fulfill the contentious trades randomly using random zeedig generated from a pre-announced salt and a hash of some or all of the order book for the window. 3) Return the results and the hashes of the order book, next salt, etc, for verifiability and prep. 4) Re-open the order window. High frequency traders would hate this, because they wouldn't be able to pounce on quick movements, even without fronting slower traders. It would, naturally, increase latency for trades by virtue of having to wait for market resolution. However, mere sequencing doesn't solve the problem of having to resolve and confirm trades (the speed of light is so cruel), so I'm left utterly unsold on the market-efficiency benefit of ultra-high order resolution. Wealthy high frequency traders want to use time to buy an advantage, and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy. Quantize the markets.

qeternity 8y ago
Most HFT shops are relatively small. HFT is all about latency and turn over. Big quant shops might have HFT elements but lean far more towards systematic/algo strategies that can be relatively high latency (still super low latency, but not HFT) because these are the only strategies that you can deploy serious var with. The guys crushing HFT are not huge hedge funds, and they are solving more engineering problems than building trading models. Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc. It's big institutionals with size to trade that get front run and have to worry about HFT killing their shortfall. On the institutional side, it's about lit venues preferring HFT w/ special orders types and thin top of book. On the retail side, the issue mostly comes down to direct feed vs. SIP/CQS thanks to NBBO that opened the door for latency arb courtesy of yet more regulation. Blame your regulators folks. This is why dark pools became a thing. > and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy This bit is certainly true. Source: hedge fund trader who hates HFT not in principal but because they are good at what they do
- mikert5671 8y ago
  This used to be true. Small HFT firms can find a niche thats profitable, but thats because there isnt enough money to be made by the big firms in those niches. In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.
  - qeternity 8y ago
    Yes, consolidation and layoffs. Go see how many KCG guys were kept by Virtu. If anything the industry has gotten smaller. People are just buying up flow now. There are no "big" HFT firms when compared to proper buy side. > the space is commoditized and controlled by a few firms Few firms != big firms
    - mikert5671 8y ago
      Yeah its funny, I still read outrage about those greedy "HFT players", as if HFT was still highly relevant. It was a blip in time of the financial markets when no one had high speed trading but a few. The alpha has been washed away.
      - qeternity 8y ago
        "c[1] is a bitch" - most HFT quants past few years [1] - https://en.wikipedia.org/wiki/Speed_of_light https://en.wikipedia.org/wiki/Speed_of_light
      - minhazm423 8y ago
        > The alpha has been washed away. whats that mean? so what are quants on the street doing now?
        qeternity 8y ago
        Quant !== HFT
amluto 8y ago
I don’t think this helps enough. It’ll keep people from pouncing on NASDAQ very quickly due to NASDAQ movements, but instead people will play the game of trying to be the last one into the window when trading based on information from other sources. Some form of clever randomization might help, but getting that right is very complicated.
- chaboud 8y ago
  I think you could account for hold-out by having the resolve window be longer than the trade-insert window, at least to an extent. The trade-insert window can't be too long, or it would leave lots of room for regret, like people who voted by mail for a candidate caught in a scandal two days before an election.
  - deleted 8y ago
    [deleted]
- keymone 8y ago
  why should randomization be clever? just fulfill orders in the book randomly for each time interval, wouldn't that be enough?
  - amluto 8y ago
    If I place an order to buy 1 share for $1 and another share for $1.01 because the market data shows that there is only one share available for $1, then the exchange needs to process my $1 order before my $1.01 order. More complicated scenarios exist, too, especially once you take into account resting orders and modifications to existing resting orders.
    - keymone 8y ago
      Right, unless exchange explicitly documents the fact that order of fulfillment is not guaranteed if you place them within the same time interval.
myself248 8y ago
What would be the negative effect if the time quantum was much larger, say, an hour, a day, a week?
- chaboud 8y ago
  I'd like to see qeternity chime in on this, since it's their space, but as market that is too rigid can't actually provide sufficient liquidity to users to function as an effective market. Let's say you're comparing a savings account (1% interest, a day to withdraw), six month certificates of deposit (3% interest, six months out), and cash in your pocket (%0 interest, instant), and the goal is to account for market fluctuation in Laffy Taffy and come away with the most Laffy Taffy in a year. The cash doesn't appreciate, but you can buy whenever the price changes. If Laffy Taffy is really volatile, working in cash gives you the flexibility you need to maximize your trade value and buy/sell at the right time. If Laffy Taffy never sees a price change, put your money in that CD and wait it out (assuming no other available investment vehicles). You'll be able to buy a little more pancreatic strain in six months. The savings account is somewhere in the middle. A really large quantum for a market that attempts to serve as a proxy for real world fundamentals could be prohibitively risky for participants, and that could reduce overall market participation. I suspect that there is a sweet spot, and I assert (without evidence) that the sweet spot is greater than the time it takes light to circle the globe.
  - 18pfsmt 8y ago
    Capital gains taxes are the same if you hold for a minute vs a month, but that doesn’t have to be true. I wonder if addressing the issue raised by the OP might be approached from that angle?
    - chaboud 8y ago
      Continuously figured capital gains tax is a really interesting idea.
- geofft 8y ago
  Not an expert so I might be totally off, but I think one of the risks is the existence of alternative markets. Let's say you're only allowed to trade once a week, and I buy a bunch of Hooli stock at, say, $25 today. Then they launch Yet Another Hooli Chat tomorrow and everyone has decided that's going to make the price go up. You might want to buy some shares at $27 right now, because you think they'll be worth $30 next week. And maybe I want to see my profits right now for whatever reason (maybe I worry about them shutting down their new chat service by next week and I have a very low risk tolerance) and I'm happy to see some profit now instead of maybe more profit next week. Obviously I should sell to you. I can't do that via NASDAQ because we can't trade again until next week, but if you and I are in contact, we can just trade privately ("over the counter"). If lots of people start doing that, and we all join up, we essentially become another stock exchange. So it's not in NASDAQ's interest (or anyone's, really) for them to voluntarily stop doing things that will just cause another stock exchange to exist that does those same things. The options are either to convince market participants that the new rules are actually going to be better (more profitable) for them, or to lobby for regulation that makes the old rules impossible for someone else to implement. As I understand it, this is basically the origin story of NASDAQ: the National Association of Securities Dealers believed (correctly) that they weren't getting good prices on existing stock exchanges, and computerizing a stock exchange had just become feasible, so they built an Automated Quotation system that initially just published prices to each other efficiently. Eventually it turned into an actual exchange.
deleted 8y ago
[deleted]
bradleyjg 8y ago
> First off: no. Big money plays in high frequency trading (roughly half of all trading activity), and the smaller traders without instantaneous access are the losers in this game. Vanguard is big money. Blackrock is big money. Fidelity is big money. These big money vehicles are where most Americans, that have any investments at all, have their investments. So, honest question, should we care that smaller traders are the losers in this game?
acover 8y ago
This doesn't solve the problem. There are multiple exchanges. If a real time exchange experiences a price drop then you could quickly sell stock on the quantized exchange with the hope of being randomly chosen.
- cma 8y ago
  You would quantize the whole NMS, though that would still leave open tracking stocks and composites overseas and stuff.
ISL 8y ago
I'm a slow trader -- a few trades a year. I like, or at least don't mind, HFT. It certainly doesn't hurt liquidity. There is, in principle, always someone who wants to trade with me, and the increased volume may make price-discovery a little more accurate. When I place a limit order, I don't mind at all if someone has managed to front-run my order and sell it to me at the price I set. I got the thing I wanted to buy at the price I wanted to pay. HFT is only troublesome if you play with fire -- market orders. The price you see may not be the price you get with a market order, as the market can do irrational things or front-run you. That risk is blunted entirely by limit orders. Your order might not fill, but when it does fill, it will only fill at or better than the price you asked.
- physguy1123 8y ago
  I'm pretty sure you misunderstand market orders because by definition they are only visible to the market after they have traded, so nobody can get ahead of you or do sonething irrational before your order lands. I would agree that market orders are a bad idea at any meaningful volume (outaide of retail sizes) because of liquidity and routing reasons
  - samolang 8y ago
    > I'm pretty sure you misunderstand market orders because by definition they are only visible to the market after they have traded, so nobody can get ahead of you or do sonething irrational before your order lands. Have you read Flash Boys? Dunno if the loop-holes have all been solved, but basically it was possible to front-run orders. There was a regulation requiring brokers to execute an order on the exchange that had the best current price. This rule gave no weight to size. So HFT firms could place a tiny, negative expectancy order on one exchange. Then they could see the result of that trade and cancel/place orders on the next exchange that your broker's matching algorithm was going to hit up before your order got there.
    - physguy1123 8y ago
      Yes, I work in the industry. Flash boys is misleading garbage, it's a long form advertisement for IEX. What a broker does has nothing to do with how market orders work. The strategy you're describing also doesn't really work because any respectable broker is sweeping all of the exchanges at once - the regulations considered this possibility and allowed this behavior. Also, many of the liquid symbols have single cent spreads making this strategy impossible.
mrchicity 8y ago
Interesting idea, but how would you deal with these issues: 1.) Randomizing who receives contentious trades will just encourage order splitting and gaming. Sure some of that can be banned, but nothing stops big firms from putting each trading group into different legal entities or other tricks. This also discourages traders from bidding their true most aggressive price. In time priority, you must, or someone else will snatch your trade. If you remove the reward, why take the risk? 2.) Being fast would still matter. Reality isn't quantized, so having access to relevant real world information or a proxy for such (trading activity in other markets or products) would still be an edge. Existing quantized trading points such as exchange auctions are still latency sensitive. 3.) The modern marketplace is interconnected. No ETF market maker will quote a tight spread if he can't confidently hedge his risk in the individual stocks. Going into a one second auction with random allocation is a lot riskier than just hitting the bid on Nasdaq, maybe paying an extra penny in the rare case when you're slow. A lot of liquidity comes from people running these arb/stat arb trades. It tightens spreads and helps keep prices in line. Why harm it? 4.) There is more to HFT success than speed and I don't think this would hurt them too much or take us back to 1997 with day traders sitting at home making big money. Virtu or some other HFT shop was the biggest trader on IEX, and they have a speed bump similar to this, just less extreme.
- chaboud 8y ago
  For 1), I'd randomize with proportional unit (share) representation, and I'd certainly be open to rule-prioritized execution (e.g. most-favorable taker first) if it didn't lead to degenerate incetives. Smart market design can incentivize people to play at their best price. For example: locational marginal pricing in wholesale energy markets... 2) I agree that the real world is quantized, but I think that a settlement tock to the bidding tick could be used to reduce the value of proximity. IEX actually implemented general latency with long runs of fiber, which is a really elegant fix. They couldn't make the rest of the world latent, so it's something like 700 microseconds, enough to remove colocation advantages, but only enough to solve for New York. 3) As far as I know, HFT's like to play in limit order and derivative books. It's where practices like flashing and spoofing have come from. Market orders are fraught with peril, especially if you don't know the matching rules for the exchange. As far as tightening the spread and aiding price discovery, I don't think that those two things are the same. If a security has naturally low volume, responsive high frequency trading can effectively be predatory. 4) I agree that there is more to HFT than just speed, but I view high frequency temporal arbitrage as an unnecessary market feature that provides the illusion of liquidity right up until that liquidity would truly be useful (since robots get benched when things go strange). Granted, the temporal steps that I'm advocating here are a little provocative. The US could be solved in something like 200ms, and larger global markets, like currency exchange, are already fairly decentralized (though not as much as they used to be, as far as I know). Either way, I don't think that NASDAQ can assure global temporal coherence, especially without controlling the entire network. Given that, it makes sense to design robust systems that don't pivot into rare modalities in exceptional cases. Just pull clock slew off the board.
monch1962 8y ago
Bear in mind that exchanges are owned by the companies that trade on them - they've got a VERY strong vested interest in not fixing the problem. HFT works because fast traders can see a buy and sell order that are a distance apart, buy from the seller, then immediately offer to sell it at a fractionally higher price. Because they can see the buy order at all times, they know they can sell what they've just bought and make a tiny profit. All they have to do is ensure they can see the buy and sell orders faster than anyone else, then keep hitting those orders. Repeat until retirement. Several years ago, a new exchange was set up to try to address this problem by simply putting a huge coil (many km) of fibre in front of the system/s that accepted orders. This approach meant that, while HFTs could still see orders before anyone else and hit them faster, their speed advantage was largely lost due to the latency as their order placement was just a bit slower. As a result there was no guarantee the 2nd part of the order those HFTs were hitting was still there, so they might get left holding a position without being able to sell it at the profit they were used to. Each HFT could try to front run orders as they do now, but the fairly small increase in latency killed their advantage. HFT companies managed to avoid using this exchange very successfully.
- deleted 8y ago
  [deleted]
- KMag 8y ago
  > HFT companies managed to avoid using this exchange very successfully. You mean they didn't accidentally trade on IEX? That's not surprising. Also, I would believe that if you're doing pure latency arb, then trading on IEX isn't profitable, but there are other high-frequency strategies besides pure latency arb. Are you restricting your definition of HFT to pure latency arb strategies?
dnautics 8y ago
Why not, instead of quantizing the market, just have a 1 second (or whatever) sliding window where trades are locked prior to resolution. In other words, you can put an order in whenever, but it resolves at least one second in and can't be cancelled for two seconds (unless the trader idiotically puts a cancel order in without any extra information)
londons_explore 8y ago
If you quantise the market, someone else will start a secondary market for the same commodity and trade there, waiting till the close of the one second window to arbitrage to the main market. People who participate directly on the main market then effectively loose out, since you are doing your order blind in the future while other people on the secondary market are trading real-time and have more information than you at the close of the 1 second window.
minhazm423 8y ago
how the hell do i understand any of what you guys are talking about? what are some good resources?

qeternity 8y ago

Most HFT shops are relatively small. HFT is all about latency and turn over. Big quant shops might have HFT elements but lean far more towards systematic/algo strategies that can be relatively high latency (still super low latency, but not HFT) because these are the only strategies that you can deploy serious var with. The guys crushing HFT are not huge hedge funds, and they are solving more engineering problems than building trading models. Also, no, small traders don't lose. Retail traders et al get much tighter spreads, cheaper execution by routing to internalizers, etc. It's big institutionals with size to trade that get front run and have to worry about HFT killing their shortfall. On the institutional side, it's about lit venues preferring HFT w/ special orders types and thin top of book. On the retail side, the issue mostly comes down to direct feed vs. SIP/CQS thanks to NBBO that opened the door for latency arb courtesy of yet more regulation. Blame your regulators folks. This is why dark pools became a thing. > and the liquidity support they provide to the markets is dubious, at best, since they pull the plug as soon as things get crazy This bit is certainly true. Source: hedge fund trader who hates HFT not in principal but because they are good at what they do

mikert5671 8y ago
This used to be true. Small HFT firms can find a niche thats profitable, but thats because there isnt enough money to be made by the big firms in those niches. In the last few years there has been massive consolidation of the smaller HFT players, the space is commoditized and controlled by a few firms.
- qeternity 8y ago
  Yes, consolidation and layoffs. Go see how many KCG guys were kept by Virtu. If anything the industry has gotten smaller. People are just buying up flow now. There are no "big" HFT firms when compared to proper buy side. > the space is commoditized and controlled by a few firms Few firms != big firms
  - mikert5671 8y ago
    Yeah its funny, I still read outrage about those greedy "HFT players", as if HFT was still highly relevant. It was a blip in time of the financial markets when no one had high speed trading but a few. The alpha has been washed away.
    - qeternity 8y ago
      "c[1] is a bitch" - most HFT quants past few years [1] - https://en.wikipedia.org/wiki/Speed_of_light https://en.wikipedia.org/wiki/Speed_of_light
    - minhazm423 8y ago
      > The alpha has been washed away. whats that mean? so what are quants on the street doing now?
      - qeternity 8y ago
        Quant !== HFT

amluto 8y ago

I don’t think this helps enough. It’ll keep people from pouncing on NASDAQ very quickly due to NASDAQ movements, but instead people will play the game of trying to be the last one into the window when trading based on information from other sources. Some form of clever randomization might help, but getting that right is very complicated.

chaboud 8y ago
I think you could account for hold-out by having the resolve window be longer than the trade-insert window, at least to an extent. The trade-insert window can't be too long, or it would leave lots of room for regret, like people who voted by mail for a candidate caught in a scandal two days before an election.
- deleted 8y ago
  [deleted]
keymone 8y ago
why should randomization be clever? just fulfill orders in the book randomly for each time interval, wouldn't that be enough?
- amluto 8y ago
  If I place an order to buy 1 share for $1 and another share for $1.01 because the market data shows that there is only one share available for $1, then the exchange needs to process my $1 order before my $1.01 order. More complicated scenarios exist, too, especially once you take into account resting orders and modifications to existing resting orders.
  - keymone 8y ago
    Right, unless exchange explicitly documents the fact that order of fulfillment is not guaranteed if you place them within the same time interval.

myself248 8y ago

What would be the negative effect if the time quantum was much larger, say, an hour, a day, a week?

chaboud 8y ago
I'd like to see qeternity chime in on this, since it's their space, but as market that is too rigid can't actually provide sufficient liquidity to users to function as an effective market. Let's say you're comparing a savings account (1% interest, a day to withdraw), six month certificates of deposit (3% interest, six months out), and cash in your pocket (%0 interest, instant), and the goal is to account for market fluctuation in Laffy Taffy and come away with the most Laffy Taffy in a year. The cash doesn't appreciate, but you can buy whenever the price changes. If Laffy Taffy is really volatile, working in cash gives you the flexibility you need to maximize your trade value and buy/sell at the right time. If Laffy Taffy never sees a price change, put your money in that CD and wait it out (assuming no other available investment vehicles). You'll be able to buy a little more pancreatic strain in six months. The savings account is somewhere in the middle. A really large quantum for a market that attempts to serve as a proxy for real world fundamentals could be prohibitively risky for participants, and that could reduce overall market participation. I suspect that there is a sweet spot, and I assert (without evidence) that the sweet spot is greater than the time it takes light to circle the globe.
- 18pfsmt 8y ago
  Capital gains taxes are the same if you hold for a minute vs a month, but that doesn’t have to be true. I wonder if addressing the issue raised by the OP might be approached from that angle?
  - chaboud 8y ago
    Continuously figured capital gains tax is a really interesting idea.
geofft 8y ago
Not an expert so I might be totally off, but I think one of the risks is the existence of alternative markets. Let's say you're only allowed to trade once a week, and I buy a bunch of Hooli stock at, say, $25 today. Then they launch Yet Another Hooli Chat tomorrow and everyone has decided that's going to make the price go up. You might want to buy some shares at $27 right now, because you think they'll be worth $30 next week. And maybe I want to see my profits right now for whatever reason (maybe I worry about them shutting down their new chat service by next week and I have a very low risk tolerance) and I'm happy to see some profit now instead of maybe more profit next week. Obviously I should sell to you. I can't do that via NASDAQ because we can't trade again until next week, but if you and I are in contact, we can just trade privately ("over the counter"). If lots of people start doing that, and we all join up, we essentially become another stock exchange. So it's not in NASDAQ's interest (or anyone's, really) for them to voluntarily stop doing things that will just cause another stock exchange to exist that does those same things. The options are either to convince market participants that the new rules are actually going to be better (more profitable) for them, or to lobby for regulation that makes the old rules impossible for someone else to implement. As I understand it, this is basically the origin story of NASDAQ: the National Association of Securities Dealers believed (correctly) that they weren't getting good prices on existing stock exchanges, and computerizing a stock exchange had just become feasible, so they built an Automated Quotation system that initially just published prices to each other efficiently. Eventually it turned into an actual exchange.

deleted 8y ago

[deleted]

bradleyjg 8y ago

> First off: no. Big money plays in high frequency trading (roughly half of all trading activity), and the smaller traders without instantaneous access are the losers in this game. Vanguard is big money. Blackrock is big money. Fidelity is big money. These big money vehicles are where most Americans, that have any investments at all, have their investments. So, honest question, should we care that smaller traders are the losers in this game?

acover 8y ago

This doesn't solve the problem. There are multiple exchanges. If a real time exchange experiences a price drop then you could quickly sell stock on the quantized exchange with the hope of being randomly chosen.

cma 8y ago
You would quantize the whole NMS, though that would still leave open tracking stocks and composites overseas and stuff.

ISL 8y ago

I'm a slow trader -- a few trades a year. I like, or at least don't mind, HFT. It certainly doesn't hurt liquidity. There is, in principle, always someone who wants to trade with me, and the increased volume may make price-discovery a little more accurate. When I place a limit order, I don't mind at all if someone has managed to front-run my order and sell it to me at the price I set. I got the thing I wanted to buy at the price I wanted to pay. HFT is only troublesome if you play with fire -- market orders. The price you see may not be the price you get with a market order, as the market can do irrational things or front-run you. That risk is blunted entirely by limit orders. Your order might not fill, but when it does fill, it will only fill at or better than the price you asked.

physguy1123 8y ago
I'm pretty sure you misunderstand market orders because by definition they are only visible to the market after they have traded, so nobody can get ahead of you or do sonething irrational before your order lands. I would agree that market orders are a bad idea at any meaningful volume (outaide of retail sizes) because of liquidity and routing reasons
- samolang 8y ago
  > I'm pretty sure you misunderstand market orders because by definition they are only visible to the market after they have traded, so nobody can get ahead of you or do sonething irrational before your order lands. Have you read Flash Boys? Dunno if the loop-holes have all been solved, but basically it was possible to front-run orders. There was a regulation requiring brokers to execute an order on the exchange that had the best current price. This rule gave no weight to size. So HFT firms could place a tiny, negative expectancy order on one exchange. Then they could see the result of that trade and cancel/place orders on the next exchange that your broker's matching algorithm was going to hit up before your order got there.
  - physguy1123 8y ago
    Yes, I work in the industry. Flash boys is misleading garbage, it's a long form advertisement for IEX. What a broker does has nothing to do with how market orders work. The strategy you're describing also doesn't really work because any respectable broker is sweeping all of the exchanges at once - the regulations considered this possibility and allowed this behavior. Also, many of the liquid symbols have single cent spreads making this strategy impossible.

mrchicity 8y ago

Interesting idea, but how would you deal with these issues: 1.) Randomizing who receives contentious trades will just encourage order splitting and gaming. Sure some of that can be banned, but nothing stops big firms from putting each trading group into different legal entities or other tricks. This also discourages traders from bidding their true most aggressive price. In time priority, you must, or someone else will snatch your trade. If you remove the reward, why take the risk? 2.) Being fast would still matter. Reality isn't quantized, so having access to relevant real world information or a proxy for such (trading activity in other markets or products) would still be an edge. Existing quantized trading points such as exchange auctions are still latency sensitive. 3.) The modern marketplace is interconnected. No ETF market maker will quote a tight spread if he can't confidently hedge his risk in the individual stocks. Going into a one second auction with random allocation is a lot riskier than just hitting the bid on Nasdaq, maybe paying an extra penny in the rare case when you're slow. A lot of liquidity comes from people running these arb/stat arb trades. It tightens spreads and helps keep prices in line. Why harm it? 4.) There is more to HFT success than speed and I don't think this would hurt them too much or take us back to 1997 with day traders sitting at home making big money. Virtu or some other HFT shop was the biggest trader on IEX, and they have a speed bump similar to this, just less extreme.

chaboud 8y ago
For 1), I'd randomize with proportional unit (share) representation, and I'd certainly be open to rule-prioritized execution (e.g. most-favorable taker first) if it didn't lead to degenerate incetives. Smart market design can incentivize people to play at their best price. For example: locational marginal pricing in wholesale energy markets... 2) I agree that the real world is quantized, but I think that a settlement tock to the bidding tick could be used to reduce the value of proximity. IEX actually implemented general latency with long runs of fiber, which is a really elegant fix. They couldn't make the rest of the world latent, so it's something like 700 microseconds, enough to remove colocation advantages, but only enough to solve for New York. 3) As far as I know, HFT's like to play in limit order and derivative books. It's where practices like flashing and spoofing have come from. Market orders are fraught with peril, especially if you don't know the matching rules for the exchange. As far as tightening the spread and aiding price discovery, I don't think that those two things are the same. If a security has naturally low volume, responsive high frequency trading can effectively be predatory. 4) I agree that there is more to HFT than just speed, but I view high frequency temporal arbitrage as an unnecessary market feature that provides the illusion of liquidity right up until that liquidity would truly be useful (since robots get benched when things go strange). Granted, the temporal steps that I'm advocating here are a little provocative. The US could be solved in something like 200ms, and larger global markets, like currency exchange, are already fairly decentralized (though not as much as they used to be, as far as I know). Either way, I don't think that NASDAQ can assure global temporal coherence, especially without controlling the entire network. Given that, it makes sense to design robust systems that don't pivot into rare modalities in exceptional cases. Just pull clock slew off the board.

monch1962 8y ago

Bear in mind that exchanges are owned by the companies that trade on them - they've got a VERY strong vested interest in not fixing the problem. HFT works because fast traders can see a buy and sell order that are a distance apart, buy from the seller, then immediately offer to sell it at a fractionally higher price. Because they can see the buy order at all times, they know they can sell what they've just bought and make a tiny profit. All they have to do is ensure they can see the buy and sell orders faster than anyone else, then keep hitting those orders. Repeat until retirement. Several years ago, a new exchange was set up to try to address this problem by simply putting a huge coil (many km) of fibre in front of the system/s that accepted orders. This approach meant that, while HFTs could still see orders before anyone else and hit them faster, their speed advantage was largely lost due to the latency as their order placement was just a bit slower. As a result there was no guarantee the 2nd part of the order those HFTs were hitting was still there, so they might get left holding a position without being able to sell it at the profit they were used to. Each HFT could try to front run orders as they do now, but the fairly small increase in latency killed their advantage. HFT companies managed to avoid using this exchange very successfully.

deleted 8y ago
[deleted]
KMag 8y ago
> HFT companies managed to avoid using this exchange very successfully. You mean they didn't accidentally trade on IEX? That's not surprising. Also, I would believe that if you're doing pure latency arb, then trading on IEX isn't profitable, but there are other high-frequency strategies besides pure latency arb. Are you restricting your definition of HFT to pure latency arb strategies?

dnautics 8y ago

Why not, instead of quantizing the market, just have a 1 second (or whatever) sliding window where trades are locked prior to resolution. In other words, you can put an order in whenever, but it resolves at least one second in and can't be cancelled for two seconds (unless the trader idiotically puts a cancel order in without any extra information)

londons_explore 8y ago

If you quantise the market, someone else will start a secondary market for the same commodity and trade there, waiting till the close of the one second window to arbitrage to the main market. People who participate directly on the main market then effectively loose out, since you are doing your order blind in the future while other people on the secondary market are trading real-time and have more information than you at the close of the 1 second window.

minhazm423 8y ago

how the hell do i understand any of what you guys are talking about? what are some good resources?