4 ms·

That would result in less efficient markets (which means higher spreads and more expensive transactions) and the market makers, who at present trade at high fre

That would result in less efficient markets (which means higher spreads and more expensive transactions) and the market makers, who at present trade at high frequency, would capture more wealth than they do now.

powera 16y ago
How is it less efficient? What knowledge is conveyed in 10 seconds?
- ashika 16y ago
  I think you're conflating computational finance with geographical arbitrage, and its pursuit by some traders. Computational finance is a general discipline that's more concerned with modeling and prediction of future asset prices, whereas the problem discussed in the article/paper has virtually nothing to do with prediction or modeling. It's much more about the pennies made when taking related product's prices to equilibrium in global markets, and a novel strategy of doing that.
  - powera 16y ago
    I guess the solution is more to combat computational finance, but if there is time for prices everywhere to propagate between trades, the opportunities for geographical arbitrage diminish greatly. I think it's a bug in the system that this arbitrage can even exist, though. It's not like, say, rice, the location of your shares doesn't matter.
- ig1 16y ago
  Say a negative announcement is made regarding a stock when does it impact the price, now or ten seconds in the future ? If an exchange limits trading to every 10 seconds, then those trades will just happen privately between firms. So now the privately trading firms will know the "real" price of the stock, but the people on the exchange will be left it the dark with the "old" price. Once you hit the the next allowed trading period, everyone is going to be selling exactly simultaneously, which will cause a nosedive in the price. Institutional investors like pension funds are legally obliged to sell shares if they go past certain trigger points, so if the nosedive cause them to get triggered suddenly you have a lot more selling and a market in panic. Different people have different requirements for speed, and this naturally smoothes out trading, forcing everyone to trade at the same time is just asking for a disaster to happen. Plus there's all sorts of other complications. For example order matching. There's one buy order and 100 sell orders. How do you decide which sell order to fill ? - you can't do it by time of ordering anymore, but you need a transparent way to ensure fairness. So you randomize it. But then your rewarding whoever manages to put the most orders in, so you need a way to fix that, and then fix the problems in that fix and so on and so on until you end up with a horribly convoluted opaque system.
prodigal_erik 16y ago
It's unhealthy that market makers with obligations toward the market are being displaced by these HFT parasites that appear to serve the same function—except when they don't, as during the flash crash. And the market wouldn't be materially less efficient. The reason to have a market is to allocate resources towards effective producers by pricing them properly. Well, "no human could react quickly enough to buy the stock in New York and sell it in London before the prices reversed" means we know the market would inevitably correct that price even without the presence of that HFT. We are rewarding overinvestment in reaching price equilibria faster, when it already takes less time than it will for a producer to make any use of the money.
- ig1 16y ago
  Flash crashes aren't an inherent part of HFT, they're generally caused by buggy software. Computer caused crashes have happened long before HFT became popular, and so for that matter have human caused crashes ("fat-finger crashes"). IMO. The main problem is that exchanges can't afford talented developers, they simply don't have the money to compete with the banks and hedge funds. Most exchanges have stop signals (i.e. a message they can broadcast that can stop computer trading, etc.) but often they fail to use them. Exchanges should be implementing algos to better detect abnormal behaviour (whether by human or computer) and prevent flash crashes before they happen.
quanticle 16y ago
Really? Do you have any evidence for that or are you just spouting off the standard line that faster trading necessarily means better trading? I don't see how any economic conditions could change enough in three or four milliseconds to justify the amount of high frequency trading that goes on today.
- notaddicted 16y ago
  First, 4ms is 3.4 orders of magnitude off 10 seconds. Second, do you have any argument that isn't based on personal ignorance? The stock market isn't even open at night, no one thinks that it is necessary to trade 20 times a second every second, they just want to. The stock market doesn't directly represent economic conditions, it represents investors assessment of economic conditions, thus it can change as fast as they can change their mind. If someone wants to only trade every ten seconds they can go ahead. If someone wants to open a stock exchange where everyone can only trade every ten seconds they can go ahead.
  - aroon 16y ago
    How does a machine taking advantage of small arbitrage opportunities that last fractions of a second represent an "investors assessment of economic conditions"?
    - gaius 16y ago
      Because they have implemented their assessment-making process in code.
- quant18 16y ago
  If there is evidence to be found either way, you may want to look into studies of the Taiwan Stock Exchange. In the past the TWSE had a similar mechanism to the one you suggest: 30-second call auctions all day long (as compared to other exchanges who typically only had auctions at opening and closing time, and did continuous trading the rest of the day). Basically they'd give one best bid/ask update on a stock, gather new orders for a while (it was slightly random, sometimes as little as 22 seconds IIRC), match them at the volume-maximising price, and send out the new best bid/ask update. (Within this structure there was still time priority --- i.e. you only had to wake up once every 30 seconds, but when you did you had to send your new order ASAP. Also there was no atomic price amendment message ... you had to send an order delete and then an order create message, which caused all sorts of hilarity when they decided to take more than 30 seconds to send you a cancel acknowledgement.) I read a study from 1998 basically supporting your position ... the authors concluded that "The call market method is more effective in reducing the volatility of high-volume stocks than low-volume stocks. This contradicts conventional wisdom which suggests that the call market method is superior for thinly traded stocks, while the continuous auction method is preferred for heavily traded stocks. The call market method does not impair liquidity and price discovery in the call market appears more efficient than in the continuous auction market." http://www2.hawaii.edu/~rheesg/Belgrade/Taiwan/TSEfinal.pdf http://www2.hawaii.edu/~rheesg/Belgrade/Taiwan/TSEfinal.pdf On the other hand, just a few months ago, the TWSE introduced continuous trading in response to pressure from exchange participants --- but only for warrants: http://www.twse.com.tw/en/about/press_room/tsec_news_detail.php?id=5635 http://www.twse.com.tw/en/about/press_room/tsec_news_detail.... http://www.twse.com.tw/en/products/trading_rules/mechanism01.php#7 http://www.twse.com.tw/en/products/trading_rules/mechanism01... At this point I don't know yet of any detailed studies of the effects of that change. Also it's been years since I traded TW stocks, and I never traded TW warrants, so unfortunately off the top of my head I can't offer you an anecdotal account of the effects of the change either.
motters 16y ago
Unlikely. Very high speed trading of this kind is likely to lead to large uncontrolled fluctuations in the financial system, which is not efficient and results in boom and bust type behavior.
joshu 16y ago
You are incorrect. The markets would trade at more "fair" prices (representing a a larger group of people) at slightly less frequency. Vast sizes of stock ("block trades") already trade off-exchange in half-hourly crossings on posit, etc.
- ig1 16y ago
  Prices for block trades aren't necessarily the same as "normal" prices. I've noticed that quite a few banks when doing VWAP calculations will do separate calculations including and excluding block trades rather than treating them as identical.
  - joshu 16y ago
    Depends on how they have agreed to price the vwap. Presumably someone trying to hit vwap is trading on the normal markets and wouldn't interact with the block trades (which are happening elsewhere and only reported to the exchanges)

powera 16y ago

How is it less efficient? What knowledge is conveyed in 10 seconds?

ashika 16y ago
I think you're conflating computational finance with geographical arbitrage, and its pursuit by some traders. Computational finance is a general discipline that's more concerned with modeling and prediction of future asset prices, whereas the problem discussed in the article/paper has virtually nothing to do with prediction or modeling. It's much more about the pennies made when taking related product's prices to equilibrium in global markets, and a novel strategy of doing that.
- powera 16y ago
  I guess the solution is more to combat computational finance, but if there is time for prices everywhere to propagate between trades, the opportunities for geographical arbitrage diminish greatly. I think it's a bug in the system that this arbitrage can even exist, though. It's not like, say, rice, the location of your shares doesn't matter.
ig1 16y ago
Say a negative announcement is made regarding a stock when does it impact the price, now or ten seconds in the future ? If an exchange limits trading to every 10 seconds, then those trades will just happen privately between firms. So now the privately trading firms will know the "real" price of the stock, but the people on the exchange will be left it the dark with the "old" price. Once you hit the the next allowed trading period, everyone is going to be selling exactly simultaneously, which will cause a nosedive in the price. Institutional investors like pension funds are legally obliged to sell shares if they go past certain trigger points, so if the nosedive cause them to get triggered suddenly you have a lot more selling and a market in panic. Different people have different requirements for speed, and this naturally smoothes out trading, forcing everyone to trade at the same time is just asking for a disaster to happen. Plus there's all sorts of other complications. For example order matching. There's one buy order and 100 sell orders. How do you decide which sell order to fill ? - you can't do it by time of ordering anymore, but you need a transparent way to ensure fairness. So you randomize it. But then your rewarding whoever manages to put the most orders in, so you need a way to fix that, and then fix the problems in that fix and so on and so on until you end up with a horribly convoluted opaque system.

prodigal_erik 16y ago

It's unhealthy that market makers with obligations toward the market are being displaced by these HFT parasites that appear to serve the same function—except when they don't, as during the flash crash. And the market wouldn't be materially less efficient. The reason to have a market is to allocate resources towards effective producers by pricing them properly. Well, "no human could react quickly enough to buy the stock in New York and sell it in London before the prices reversed" means we know the market would inevitably correct that price even without the presence of that HFT. We are rewarding overinvestment in reaching price equilibria faster, when it already takes less time than it will for a producer to make any use of the money.

ig1 16y ago
Flash crashes aren't an inherent part of HFT, they're generally caused by buggy software. Computer caused crashes have happened long before HFT became popular, and so for that matter have human caused crashes ("fat-finger crashes"). IMO. The main problem is that exchanges can't afford talented developers, they simply don't have the money to compete with the banks and hedge funds. Most exchanges have stop signals (i.e. a message they can broadcast that can stop computer trading, etc.) but often they fail to use them. Exchanges should be implementing algos to better detect abnormal behaviour (whether by human or computer) and prevent flash crashes before they happen.

quanticle 16y ago

Really? Do you have any evidence for that or are you just spouting off the standard line that faster trading necessarily means better trading? I don't see how any economic conditions could change enough in three or four milliseconds to justify the amount of high frequency trading that goes on today.

notaddicted 16y ago
First, 4ms is 3.4 orders of magnitude off 10 seconds. Second, do you have any argument that isn't based on personal ignorance? The stock market isn't even open at night, no one thinks that it is necessary to trade 20 times a second every second, they just want to. The stock market doesn't directly represent economic conditions, it represents investors assessment of economic conditions, thus it can change as fast as they can change their mind. If someone wants to only trade every ten seconds they can go ahead. If someone wants to open a stock exchange where everyone can only trade every ten seconds they can go ahead.
- aroon 16y ago
  How does a machine taking advantage of small arbitrage opportunities that last fractions of a second represent an "investors assessment of economic conditions"?
  - gaius 16y ago
    Because they have implemented their assessment-making process in code.
quant18 16y ago
If there is evidence to be found either way, you may want to look into studies of the Taiwan Stock Exchange. In the past the TWSE had a similar mechanism to the one you suggest: 30-second call auctions all day long (as compared to other exchanges who typically only had auctions at opening and closing time, and did continuous trading the rest of the day). Basically they'd give one best bid/ask update on a stock, gather new orders for a while (it was slightly random, sometimes as little as 22 seconds IIRC), match them at the volume-maximising price, and send out the new best bid/ask update. (Within this structure there was still time priority --- i.e. you only had to wake up once every 30 seconds, but when you did you had to send your new order ASAP. Also there was no atomic price amendment message ... you had to send an order delete and then an order create message, which caused all sorts of hilarity when they decided to take more than 30 seconds to send you a cancel acknowledgement.) I read a study from 1998 basically supporting your position ... the authors concluded that "The call market method is more effective in reducing the volatility of high-volume stocks than low-volume stocks. This contradicts conventional wisdom which suggests that the call market method is superior for thinly traded stocks, while the continuous auction method is preferred for heavily traded stocks. The call market method does not impair liquidity and price discovery in the call market appears more efficient than in the continuous auction market." http://www2.hawaii.edu/~rheesg/Belgrade/Taiwan/TSEfinal.pdf http://www2.hawaii.edu/~rheesg/Belgrade/Taiwan/TSEfinal.pdf On the other hand, just a few months ago, the TWSE introduced continuous trading in response to pressure from exchange participants --- but only for warrants: http://www.twse.com.tw/en/about/press_room/tsec_news_detail.php?id=5635 http://www.twse.com.tw/en/about/press_room/tsec_news_detail.... http://www.twse.com.tw/en/products/trading_rules/mechanism01.php#7 http://www.twse.com.tw/en/products/trading_rules/mechanism01... At this point I don't know yet of any detailed studies of the effects of that change. Also it's been years since I traded TW stocks, and I never traded TW warrants, so unfortunately off the top of my head I can't offer you an anecdotal account of the effects of the change either.

motters 16y ago

Unlikely. Very high speed trading of this kind is likely to lead to large uncontrolled fluctuations in the financial system, which is not efficient and results in boom and bust type behavior.

joshu 16y ago

You are incorrect. The markets would trade at more "fair" prices (representing a a larger group of people) at slightly less frequency. Vast sizes of stock ("block trades") already trade off-exchange in half-hourly crossings on posit, etc.

ig1 16y ago
Prices for block trades aren't necessarily the same as "normal" prices. I've noticed that quite a few banks when doing VWAP calculations will do separate calculations including and excluding block trades rather than treating them as identical.
- joshu 16y ago
  Depends on how they have agreed to price the vwap. Presumably someone trying to hit vwap is trading on the normal markets and wouldn't interact with the block trades (which are happening elsewhere and only reported to the exchanges)