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I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It w

I like that this innovation is market-driven and introduced as a competing alternative, rather than imposed on existing markets in the form of regulation. It will be interesting to see if this market provides better pricing for non-HFT participants. The HFT outfits claim they net out to better pricing for all ("liquidity benefits"), but that's somewhat hard to swallow given that they're acting as giant money sinks on the market system.

ewjordan 16y ago
IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market. It will be interesting to see if this market provides better pricing for non-HFT participants. Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders. Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...
- klochner 16y ago
  I honestly didn't read it closely, but apparently you didn't either. Your assertion: Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. compare that with: Since trading on Light Pool will be more expensive and slower for those firms, they’re not likely to use the ECN, reducing the negative selection investors experience, Galinov said. Contributors, which will include long-term investors, will receive a “significant” rebate when they trade against orders resting in Light Pool, while neutral firms, or those whose behavior falls between the other groups, may or may not get one, Galinov said. So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this: http://ai.eecs.umich.edu/people/wellman/?p=40 (disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)
  - mapgrep 16y ago
    You: "They are trying to get incentives right, rather than outright banning HFTs." Article: "Firms that fail to meet standards aimed at protecting long- term investors won’t be allowed directly on the Credit Suisse venue" So it's both: They are outright banning AND adjusting incentives.
    - klochner 16y ago
      I think banning is a little strong, article: Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes. so they can participate, but they get penalized.
tptacek 16y ago
I don't understand that last sentence at all. HFTs demonstrably are liquidity providers. That's a technical term with a real meaning: liquidity is the ability to trade when you want to trade in the quantity you want to trade it, and it most certainly is not a natural property of the market; in order to buy an instrument, someone has to be willing to sell it. Meanwhile, what is a "giant money sink", and how is that what HFTs are? I see how HFTs cut out the middlemen who used to profit from volatility, but the low-tech traders they replaced were not themselves value investors.
- hackerblues 16y ago
  My take on the money sink comment: If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant. If another person joins in and is making a net profit then it must be the case that the combined wealth of the original n is decreasing. Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.
  - tptacek 16y ago
    The stock market is not a closed system. The total value contained in the markets rises over time.
    - klochner 16y ago
      Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparity.
      - tptacek 16y ago
        That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?

ewjordan 16y ago

IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market. It will be interesting to see if this market provides better pricing for non-HFT participants. Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders. Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...

klochner 16y ago
I honestly didn't read it closely, but apparently you didn't either. Your assertion: Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much. compare that with: Since trading on Light Pool will be more expensive and slower for those firms, they’re not likely to use the ECN, reducing the negative selection investors experience, Galinov said. Contributors, which will include long-term investors, will receive a “significant” rebate when they trade against orders resting in Light Pool, while neutral firms, or those whose behavior falls between the other groups, may or may not get one, Galinov said. So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this: http://ai.eecs.umich.edu/people/wellman/?p=40 (disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)
- mapgrep 16y ago
  You: "They are trying to get incentives right, rather than outright banning HFTs." Article: "Firms that fail to meet standards aimed at protecting long- term investors won’t be allowed directly on the Credit Suisse venue" So it's both: They are outright banning AND adjusting incentives.
  - klochner 16y ago
    I think banning is a little strong, article: Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes. so they can participate, but they get penalized.

tptacek 16y ago

I don't understand that last sentence at all. HFTs demonstrably are liquidity providers. That's a technical term with a real meaning: liquidity is the ability to trade when you want to trade in the quantity you want to trade it, and it most certainly is not a natural property of the market; in order to buy an instrument, someone has to be willing to sell it. Meanwhile, what is a "giant money sink", and how is that what HFTs are? I see how HFTs cut out the middlemen who used to profit from volatility, but the low-tech traders they replaced were not themselves value investors.

hackerblues 16y ago
My take on the money sink comment: If there are n people in the market moving money around in a closed system then the combined wealth of those n people is constant. If another person joins in and is making a net profit then it must be the case that the combined wealth of the original n is decreasing. Admittedly this relies on money not being created or destroyed, which may cause the model to be a poor approximation of reality.
- tptacek 16y ago
  The stock market is not a closed system. The total value contained in the markets rises over time.
  - klochner 16y ago
    Not as a result of trading. You can argue that getting equity pricing right helps companies with their access to capital, but once you have the pricing right at 100ms I don't understand what value HFT firms are adding by pouring money and talent into getting the pricing right at 10ns. It seems like such an obvious win for society to mitigate the winner-take-all incentive of being first to market on a pricing disparity.
    - tptacek 16y ago
      That's slippery slope logic. If the pricing is right at 1s, why pour money and talent into getting it right at 100ms? What's the win to society to "mitigate" an "incentive"? Is the problem volatility? Other forces create huge volatility. Should we penalize anything that creates volatility? Maybe we should end all program trading? Meanwhile, you're effectively vouching for a comment that models the markets as a closed system of people dividing up a single pot of money. Isn't it plain that such a model is wrongheaded?