10 ms·

I have a different question about timing on stock exchanges. What social good is being served by the ability to trade at microsecond frequency? Are individual

I have a different question about timing on stock exchanges. What social good is being served by the ability to trade at microsecond frequency? Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? If this is a problem, I had this notion that stock markets (or the clearinghouses or whoever responsible) should slow down the allowed frequency to aggregate all trades within, say, 1 second, and do the clearing/price setting at that frequency. Surely being able to trade at the speed of 1 second is not a big loss of utility -- for the "legitimate" trading going on. Can't we stop this timing arms race? Or is the problem I'm thinking of not actually a concern? Are millions of us paying half a cent to these HFT trading firms' profits with every trade, just like the old notion of shaving a half a cent interest off of everyone's bank accounts to make some clever criminal rich?

summitsummit 6y ago
i don't think the point of those mechanisms are to serve social good. i would regard that as a fundamentally incorrect position to hold. the point is to make those that are advantaged by such tools to gain evergrowing more power over others. isn't that the whole history of human civilization? when's it ever been about serving a social good.
- deleted 6y ago
  [deleted]
- ISL 6y ago
  I have grain, Heather has cows, Sam has wood, Frank is elderly, Susan is a master carpenter, and Christian's kids need a larger house. Finance is the glue that allows us to barter in parallel with the world and across time. It does enormous social good. The alternative is going to the supermarket with some JavaScript to buy broccoli.
  - et2o 6y ago
    You should read Debt: The First 2000 years. This is a common but wrong idea. Barter economies have almost never existed.
Laakeri 6y ago
Trading in microseconds frequency provides liquidity to those who trade in milliseconds frequency. Trading in milliseconds frequency provides liquidity to those trading in seconds frequency and so on...
- pbhjpbhj 6y ago
  Isn't the point to provide liquidity (availability of capital) to the market, ie producers of value, not to traders. Who needs $1M for their business but can't wait a microsecond to get it? Once you have the funds you probably have to wait 3 days for the bank to grant access.
RyanHamilton 6y ago
The ICE has a speed bump, if incentives align it may become popular: https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-cftc-nod-for-speed-bump-on-u-s-futures-exchange-idUKL2N22R1E0 https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-c...
creeble 6y ago
The argument for HFC is always "more liquidity is for the greater good." I think the best way to stop the timing arms race is through tax structures that encourage longer-term investing, and penalize extreme short-term investing. But you're up against people making lots of money in the arms race.
- harryh 6y ago
  The amount of money being made in the arms race has gone down hugely over time due to computerization. Spreads are 1/10th of what they used to be (or smaller in many cases). There's really no need to fight this fight with taxes. The war has already been won.
Etheryte 6y ago
Only processing transactions once a second doesn't make the race for time go away. Taking the same example brought up in the article, Chicago and New York stock exchange, the two exchanges will never be perfectly in sync. Whosoever has the means to see a trade was made on one and then race to place a corresponding profitable order on the other before the clock ticks on that exchange, will make a profit over the others. The same will hold true no matter what granularity you make the exchange, until we reach physical limits to data transfer, which are already pretty close if you consider the orders of magnitude.
- jasonwatkinspdx 6y ago
  Right, the actual proposals to do this are obviously more sophisticated than that. The way that the bigger/better hedge funds and such avoid someone else doing latency arb on them is by having their own points of presence near global trading hubs. Their traders and algo systems decide on the trades to make, communicate them all to the POPs where they're held behind a release gate, then the POPs do a global drop of the gate based on gps/atomic time synchronization. It becomes impossible for any external system to get a latency arb advantage. An arbitrary number of exchanges could implement the same sort of ingress/egress system.
sippingjippers 6y ago
It's an ongoing debate, but there are some facts that don't change regardless of stance in the debate. If you limit HFT, then markets /do/ become less efficient. When two trading venues for the same instrument exists, say, in Europe and the US, there is no benefit to any participant for a price disparity to exist for a long period. If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? Similarly for a seller in Europe, what if you were fleeced 10% because your holdings moved favourably in the moments before you sold? HFT also makes trading cheaper for everyone. Much of the time these firms are primarily competing with each other. One way that competition manifests is in the bid/ask spread. With firms fighting for order flow, if they can improve their offer by a single cent to ensure price-time order book priority then they'll improve their price. For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. There are more aspects I'm not smart enough to discuss, like how HFT basically enables entire asset classes through dynamic hedging. The only reason that option markets exist on most stocks is because there is an HFT counterparty that sold you the option rapidly buying and selling the underlying stock to ensure its exposure to the position was only the premium you paid for the option. HFTs also provide some market stability, first through increasing liquidity having a volatility smoothing effect, and second through so-called "volatility compression" as a result of option market dynamic hedging causing HFTs to buy when others are selling and sell when others are buying. This one has a darker side as depending on their aggregate positioning, HFTs will eventually begin to dump just like everyone else. I believe HFTs are also necessary for exchange-traded funds to be priced correctly and function correctly. That's essentially because two markets always exist for an ETF: a primary market between dealers and the fund where creation/redemption units are traded, and the secondary market where regular folk buy its shares. Given the prevalence of ETFs as a retail investing vehicle, if they were mispriced this would be potentially disastrous for individual investors. Probably a bunch more good reasons for HFT, I'm not sufficiently versed in this stuff
- Scoundreller 6y ago
  > If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? > For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. As a Canadian, I take advantage of this to do USD-CAD currency exchange. Most big Canadian companies trade in Toronto and New York, so I can buy in Toronto in CAD$ and sell in New York for US$ because some HFTs are keeping them exactly in sync. All I pay is two trading commissions and a 1-2cents / $100share in spread. So converting $30k would cost me $20 in commissions and ~$12 in spread, so about 0.1% in cost and that goes down for as much as I'm comfortable in doing per trade. I probably lose a bit more in whatever distortion I've created, but $30k doesn't account for much in their hundreds of millions of $ in daily volume.
bobcostas55 6y ago
There's still an advantage to low latency with batching, as the later you go the more info you have.
- supernova87a 6y ago
  But the idea would be that no one except the central coordinating marketmaker (?) would see all the bids and asks until the time of final execution at the end of the 1 second.
cinntaile 6y ago
There's actually a stock market, IEX, that has a long physical wire to introduce a physical signal delay to counteract this. Here's an interesting podcast regarding this exchange. http://investorfieldguide.com/katsuyama/ http://investorfieldguide.com/katsuyama/
- n3k5 6y ago
  Tom Scott made a short video about these cables: https://youtu.be/d8BcCLLX4N4 https://youtu.be/d8BcCLLX4N4 61 kilometres of fibre-optics for a 350 microsecond delay.
- harryh 6y ago
  It's important to understand the original business model of IEX (and IEX's hedge fund backers) and why they put in the speedbump. When large well informed funds want to trade large blocks of shares the price tends to quickly move against them so they make their trade at a slightly worse price. These funds would all like it if the market moved slower so that they got better prices so they made an exchange that moved slower. The trick is that other people don't want to trade on exchanges with less up to date prices. So IEX made up a bunch of false stories about how HFTs were bad for retail investors. They even tricked Michael Lewis into writing a book/advertisement for them. They also produced a slick video wrapping themselves in the flag/americana to try to trick people. You can watch it here: https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
- supernova87a 6y ago
  Why do we need a long physical delay when the idea of batching / allowing only a certain frequency of trading does the same thing?
  - myrandomcomment 6y ago
    So I think we have mixed questions here. Let me address the one I know. Each of the major exchanges has a DC in which they will rent space to a 3rd party that will want to trade on the exchange. That market data feed and order execution use BGP & multicast (market data info is in multicast). Order execution can sometimes be a different link outbound. Please note I am generalizing details here sticking to mostly common items. So let’s say you are in the DC and your cage is right next to the Exchanges router so you cross connect is only 10m. So that is 50ns of latency in the path (assuming 10G SR on MM fiber). Your next competitor down from you is 20m away. So they are 100ns of latency. If you are an HFT, well. These people pay to dig through mountains to have the shorter path. What happened was this became a major issue oh, 20 years ago maybe? So what the exchange does is run the exact same length of cable to every drop off. So if you are 10m away and the longest run in the DC is 100m away then every cable run is 100m.
harryh 6y ago
There are several problems with trading at 1 second intervals (or any other fixed interval): A) What do you do when bids and asks do not match up? Who's orders get filled and who's do not? There are several possible answers to this problem, but not are satisfactory. B) You do not eliminate the advantage of speed because everyone is still incentivized to put in their orders at the last possible moment before the end of the interval. The world is continuous, not discrete. Therefore, like it or not, trading must be continuous and not discrete.
- heavenlyblue 6y ago
  B) you don’t advertise orders until the end of the second; for all ordering questions within your algorithm, you assume they have arrived at a certain random order; given two of the above, you resolve all of the orders at that end of the second too
  - harryh 6y ago
    It doesn't matter if you don't advertise orders until the end of the second. There is a whole world of information out there outside if your particular exchange. People trade on that information, so they will wait until the last possible moment before the end of the interval to gather as much of that information as possible.
    - supernova87a 6y ago
      There is human-relevant information being traded and relevant on a microsecond timescale?
      - harryh 6y ago
        Sure. Something important happens. Whoever reacts the fastest has an edge. I don't really know whether we're measuring "reacts the fastest" in terms of microseconds yet these days, but fastest is fastest no matter how much you win by. https://www.youtube.com/watch?v=cGZa-yf8vMU https://www.youtube.com/watch?v=cGZa-yf8vMU
nickjj 6y ago
> Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? And a follow up question: Wouldn't the results of this be unpredictable because the price could either be lower or higher than when the individual non-HFTer pulled the trigger to execute the trade?
akra 6y ago
For me its all about diminishing returns IMO. The benefits of minimizing latency from a day to hours to minutes does exist but the benefit gets smaller as the window reduces (and costs more to achieve). It also depends on what you believe the purpose of the market is - to scalp and trade, or to own a piece of an asset. If your in the latter category then anything tbh lower than a second provides little social utility. I have worked for these firms in the past and while they believe they do make the market "efficient" it's really the profit motive/bonuses that drives their behavior. What they are really after is "edge" to make more profit at the end of the day IMO, and one source of edge is information asymmetry which being faster than competitors gives you.
jasonwatkinspdx 6y ago
I talked about this at length with a retired quant back when the news about HFT shops first went around. The basic view is that HFT increases liquidity, which in the abstract should help everyone. My friend's view was, first, that privileged access, special order types, etc, were so egregiously wrong it need not be discussed further. Second they found the liquidity argument weak, and in general believed that signals on such short timescales were often more harmful than beneficial. They preferred a solution similar to yours, quantizing the markets by time and having one formally specified "fair playout" algorithm within the quanta. Pick the quanta such that it makes global communication time irrelevant (ie a few seconds). There's some subtleties to it but they considered the idea both workable and superior to what we have now. I have to be somewhat circumspect for privacy, but this person was quite successful at stat arb, and in a previous life very successful at finding zero days in kernel code. I generally believe they know what they're talking about in great depth on the topic. They're exactly who'd be near the top of your list of prospects if you wanted to set up a HFT shop.
- dcl 6y ago
  So according to this person, this event never happened and absolutely does not continue to happen? https://www.reuters.com/article/sec-bats-settlement-idUSL1N0UR1KN20150112 https://www.reuters.com/article/sec-bats-settlement-idUSL1N0...
  - jasonwatkinspdx 6y ago
    "My friend's view was, first, that privileged access, ... were so egregiously wrong it need not be discussed further." Can you dial down the snark and explain what argument you're making that doesn't fall under the above?
    - dcl 6y ago
      My apologies. To me, it seemed that labelling the ideas of privileged access and secret order types to be so egregiously wrong and not worthy of discussion a bit dismissive when there has been evidence that these sort of activies have occured before.
jlkasdfjkl 6y ago
There is no particular social benefit to such speed per se, but it does not hurt investors. The speed race is HFT market makers competing with each other to be the first to offer shares at a new price level. When one firm gets faster than others, it hurts other HFTs (because the fast firm can now get bigger market share) but not investors. HFTs do on average make a small profit on each trade: they are in the business of charging investors for liquidity. But the fierce competition between HFTs means that their margins get competed down and they cannot charge very much for liquidity. Their average profit per trade is tiny. The Taiwan stock exchange used to match orders every few seconds, like you suggest, instead of continuously. They switched to continuous trading earlier this year, and they say a little bit about why here: [0]. I might be wrong, but I think there is no rule preventing anyone from setting up a Taiwan-style batch-auction exchange in the US. Note that there are already over a dozen US stock exchanges, each with slightly different rules and order types, each competing for market share. If there's investor demand for a batch-auction exchange in the US, someone could create one and make a bunch of money running it. [0] https://www.twse.com.tw/en/page/products/trading/information13.html https://www.twse.com.tw/en/page/products/trading/information...
dllthomas 6y ago
If we quantize to one second, then either: 1) it still matters when in that second my order came in, and there's still a race, or 2) it doesn't matter when in that second my order came in, and there's an incentive to delay my order in case we learn something in that second. In either case, the details will differ quite a bit, but having the fastest connection and best tech is still an advantage.
a2h 6y ago
Yes, except half a cent per share not per trade.
pdovy 6y ago
HFT market maker here (my views are my own), there are some consequences that immediately fall out from periodic batch auctions like this. 1. There will still be a race to update your entry in the auction as close as possible to when it runs, because equity markets do not operate in a vacuum. Correlated futures markets don't operate this way (and the regulatory lift to make them do so is separate, and just as hard as doing this for equities), so there is still a race to incorporate the most up to date information ahead of a periodic auction. 2. This _will_ widen the bid-ask spread and reduce liquidity, for the following reasons. There are right now 16 distinct exchanges, excluding dark pools. As a market maker, I want to show my quote to buy/sell to as many participants as possible, and so I quote across a decent subset of these exchanges at any given time. I _don't_ want to get simultaneously filled on all these orders, and am relying on the fact that most of the time if I get filled once, I can cancel from all the other exchanges and then re-evaluate what I think the fair value of the stock is, and put out new orders reflecting that view. The more confidence I have that I can do this, the tighter a spread I can offer, and on the flip side the more risk of overfill there is, the wider I need to quote to account for that risk. In a simultaneous periodic batch auction world anyone can take all available liquidity market-wide trivially, so I have to either reduce liquidity across the market to a lower level to cap my risk, or substantially widen my quote to make that risk economically viable. Both are ultimately bad for counterparties. 3. This would likely serve to entrench existing wholesalers unless they were forced to stop crossing orders internally, or otherwise play by a stricter set of rules (and good luck with that). The vast, vast majority of retail activity never sees a public marketplace, but is executed by a wholesaler - so if you're leaving them out of this picture you're not really changing much. My personal $0.02 on this is that the latency race is just a turf war between liquidity providers, but has no real impact outside of that arena. There are other areas of needed reform: market fragmentation to the degree it exists today is a net negative IMO. Similarly the market-wide best execution requirement is just extra complexity and creates opportunities for regulatory arbitrage. The proliferation of exotic order types and "differentiating" exchange behavior adds complexity and creates opportunities to game the system. Exchanges charge exorbitant fees for access that create barriers to entry for smaller participants. To name a few.
b20000 6y ago
what social good is served by facebook? I suggest their servers are slowed down by 1 second so everyone spends less time on facebook.

summitsummit 6y ago

i don't think the point of those mechanisms are to serve social good. i would regard that as a fundamentally incorrect position to hold. the point is to make those that are advantaged by such tools to gain evergrowing more power over others. isn't that the whole history of human civilization? when's it ever been about serving a social good.

deleted 6y ago
[deleted]
ISL 6y ago
I have grain, Heather has cows, Sam has wood, Frank is elderly, Susan is a master carpenter, and Christian's kids need a larger house. Finance is the glue that allows us to barter in parallel with the world and across time. It does enormous social good. The alternative is going to the supermarket with some JavaScript to buy broccoli.
- et2o 6y ago
  You should read Debt: The First 2000 years. This is a common but wrong idea. Barter economies have almost never existed.

Laakeri 6y ago

Trading in microseconds frequency provides liquidity to those who trade in milliseconds frequency. Trading in milliseconds frequency provides liquidity to those trading in seconds frequency and so on...

pbhjpbhj 6y ago
Isn't the point to provide liquidity (availability of capital) to the market, ie producers of value, not to traders. Who needs $1M for their business but can't wait a microsecond to get it? Once you have the funds you probably have to wait 3 days for the bank to grant access.

RyanHamilton 6y ago

The ICE has a speed bump, if incentives align it may become popular: https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-cftc-nod-for-speed-bump-on-u-s-futures-exchange-idUKL2N22R1E0 https://uk.reuters.com/article/cftc-ice-speedbump/ice-gets-c...

creeble 6y ago

The argument for HFC is always "more liquidity is for the greater good." I think the best way to stop the timing arms race is through tax structures that encourage longer-term investing, and penalize extreme short-term investing. But you're up against people making lots of money in the arms race.

harryh 6y ago
The amount of money being made in the arms race has gone down hugely over time due to computerization. Spreads are 1/10th of what they used to be (or smaller in many cases). There's really no need to fight this fight with taxes. The war has already been won.

Etheryte 6y ago

Only processing transactions once a second doesn't make the race for time go away. Taking the same example brought up in the article, Chicago and New York stock exchange, the two exchanges will never be perfectly in sync. Whosoever has the means to see a trade was made on one and then race to place a corresponding profitable order on the other before the clock ticks on that exchange, will make a profit over the others. The same will hold true no matter what granularity you make the exchange, until we reach physical limits to data transfer, which are already pretty close if you consider the orders of magnitude.

jasonwatkinspdx 6y ago
Right, the actual proposals to do this are obviously more sophisticated than that. The way that the bigger/better hedge funds and such avoid someone else doing latency arb on them is by having their own points of presence near global trading hubs. Their traders and algo systems decide on the trades to make, communicate them all to the POPs where they're held behind a release gate, then the POPs do a global drop of the gate based on gps/atomic time synchronization. It becomes impossible for any external system to get a latency arb advantage. An arbitrary number of exchanges could implement the same sort of ingress/egress system.

sippingjippers 6y ago

It's an ongoing debate, but there are some facts that don't change regardless of stance in the debate. If you limit HFT, then markets /do/ become less efficient. When two trading venues for the same instrument exists, say, in Europe and the US, there is no benefit to any participant for a price disparity to exist for a long period. If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? Similarly for a seller in Europe, what if you were fleeced 10% because your holdings moved favourably in the moments before you sold? HFT also makes trading cheaper for everyone. Much of the time these firms are primarily competing with each other. One way that competition manifests is in the bid/ask spread. With firms fighting for order flow, if they can improve their offer by a single cent to ensure price-time order book priority then they'll improve their price. For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. There are more aspects I'm not smart enough to discuss, like how HFT basically enables entire asset classes through dynamic hedging. The only reason that option markets exist on most stocks is because there is an HFT counterparty that sold you the option rapidly buying and selling the underlying stock to ensure its exposure to the position was only the premium you paid for the option. HFTs also provide some market stability, first through increasing liquidity having a volatility smoothing effect, and second through so-called "volatility compression" as a result of option market dynamic hedging causing HFTs to buy when others are selling and sell when others are buying. This one has a darker side as depending on their aggregate positioning, HFTs will eventually begin to dump just like everyone else. I believe HFTs are also necessary for exchange-traded funds to be priced correctly and function correctly. That's essentially because two markets always exist for an ETF: a primary market between dealers and the fund where creation/redemption units are traded, and the secondary market where regular folk buy its shares. Given the prevalence of ETFs as a retail investing vehicle, if they were mispriced this would be potentially disastrous for individual investors. Probably a bunch more good reasons for HFT, I'm not sufficiently versed in this stuff

Scoundreller 6y ago
> If $GOOG tanks 10% in a day, and a retail investor buys $GOOG at its old price in Europe, who is better off? > For Joe Retail buying or selling that instrument, he just received a small improvement on the spread as a side effect of essentially duelling titans. As a Canadian, I take advantage of this to do USD-CAD currency exchange. Most big Canadian companies trade in Toronto and New York, so I can buy in Toronto in CAD$ and sell in New York for US$ because some HFTs are keeping them exactly in sync. All I pay is two trading commissions and a 1-2cents / $100share in spread. So converting $30k would cost me $20 in commissions and ~$12 in spread, so about 0.1% in cost and that goes down for as much as I'm comfortable in doing per trade. I probably lose a bit more in whatever distortion I've created, but $30k doesn't account for much in their hundreds of millions of $ in daily volume.

bobcostas55 6y ago

There's still an advantage to low latency with batching, as the later you go the more info you have.

supernova87a 6y ago
But the idea would be that no one except the central coordinating marketmaker (?) would see all the bids and asks until the time of final execution at the end of the 1 second.

cinntaile 6y ago

There's actually a stock market, IEX, that has a long physical wire to introduce a physical signal delay to counteract this. Here's an interesting podcast regarding this exchange. http://investorfieldguide.com/katsuyama/ http://investorfieldguide.com/katsuyama/

n3k5 6y ago
Tom Scott made a short video about these cables: https://youtu.be/d8BcCLLX4N4 https://youtu.be/d8BcCLLX4N4 61 kilometres of fibre-optics for a 350 microsecond delay.
harryh 6y ago
It's important to understand the original business model of IEX (and IEX's hedge fund backers) and why they put in the speedbump. When large well informed funds want to trade large blocks of shares the price tends to quickly move against them so they make their trade at a slightly worse price. These funds would all like it if the market moved slower so that they got better prices so they made an exchange that moved slower. The trick is that other people don't want to trade on exchanges with less up to date prices. So IEX made up a bunch of false stories about how HFTs were bad for retail investors. They even tricked Michael Lewis into writing a book/advertisement for them. They also produced a slick video wrapping themselves in the flag/americana to try to trick people. You can watch it here: https://www.youtube.com/watch?v=v2OZkTesSx0 https://www.youtube.com/watch?v=v2OZkTesSx0
supernova87a 6y ago
Why do we need a long physical delay when the idea of batching / allowing only a certain frequency of trading does the same thing?
- myrandomcomment 6y ago
  So I think we have mixed questions here. Let me address the one I know. Each of the major exchanges has a DC in which they will rent space to a 3rd party that will want to trade on the exchange. That market data feed and order execution use BGP & multicast (market data info is in multicast). Order execution can sometimes be a different link outbound. Please note I am generalizing details here sticking to mostly common items. So let’s say you are in the DC and your cage is right next to the Exchanges router so you cross connect is only 10m. So that is 50ns of latency in the path (assuming 10G SR on MM fiber). Your next competitor down from you is 20m away. So they are 100ns of latency. If you are an HFT, well. These people pay to dig through mountains to have the shorter path. What happened was this became a major issue oh, 20 years ago maybe? So what the exchange does is run the exact same length of cable to every drop off. So if you are 10m away and the longest run in the DC is 100m away then every cable run is 100m.

harryh 6y ago

There are several problems with trading at 1 second intervals (or any other fixed interval): A) What do you do when bids and asks do not match up? Who's orders get filled and who's do not? There are several possible answers to this problem, but not are satisfactory. B) You do not eliminate the advantage of speed because everyone is still incentivized to put in their orders at the last possible moment before the end of the interval. The world is continuous, not discrete. Therefore, like it or not, trading must be continuous and not discrete.

heavenlyblue 6y ago
B) you don’t advertise orders until the end of the second; for all ordering questions within your algorithm, you assume they have arrived at a certain random order; given two of the above, you resolve all of the orders at that end of the second too
- harryh 6y ago
  It doesn't matter if you don't advertise orders until the end of the second. There is a whole world of information out there outside if your particular exchange. People trade on that information, so they will wait until the last possible moment before the end of the interval to gather as much of that information as possible.
  - supernova87a 6y ago
    There is human-relevant information being traded and relevant on a microsecond timescale?
    - harryh 6y ago
      Sure. Something important happens. Whoever reacts the fastest has an edge. I don't really know whether we're measuring "reacts the fastest" in terms of microseconds yet these days, but fastest is fastest no matter how much you win by. https://www.youtube.com/watch?v=cGZa-yf8vMU https://www.youtube.com/watch?v=cGZa-yf8vMU

nickjj 6y ago

> Are individual investors or non-HFT participants being "fleeced" in every transaction by those who are able to take advantage of timing? And a follow up question: Wouldn't the results of this be unpredictable because the price could either be lower or higher than when the individual non-HFTer pulled the trigger to execute the trade?

akra 6y ago

For me its all about diminishing returns IMO. The benefits of minimizing latency from a day to hours to minutes does exist but the benefit gets smaller as the window reduces (and costs more to achieve). It also depends on what you believe the purpose of the market is - to scalp and trade, or to own a piece of an asset. If your in the latter category then anything tbh lower than a second provides little social utility. I have worked for these firms in the past and while they believe they do make the market "efficient" it's really the profit motive/bonuses that drives their behavior. What they are really after is "edge" to make more profit at the end of the day IMO, and one source of edge is information asymmetry which being faster than competitors gives you.

jasonwatkinspdx 6y ago

I talked about this at length with a retired quant back when the news about HFT shops first went around. The basic view is that HFT increases liquidity, which in the abstract should help everyone. My friend's view was, first, that privileged access, special order types, etc, were so egregiously wrong it need not be discussed further. Second they found the liquidity argument weak, and in general believed that signals on such short timescales were often more harmful than beneficial. They preferred a solution similar to yours, quantizing the markets by time and having one formally specified "fair playout" algorithm within the quanta. Pick the quanta such that it makes global communication time irrelevant (ie a few seconds). There's some subtleties to it but they considered the idea both workable and superior to what we have now. I have to be somewhat circumspect for privacy, but this person was quite successful at stat arb, and in a previous life very successful at finding zero days in kernel code. I generally believe they know what they're talking about in great depth on the topic. They're exactly who'd be near the top of your list of prospects if you wanted to set up a HFT shop.

dcl 6y ago
So according to this person, this event never happened and absolutely does not continue to happen? https://www.reuters.com/article/sec-bats-settlement-idUSL1N0UR1KN20150112 https://www.reuters.com/article/sec-bats-settlement-idUSL1N0...
- jasonwatkinspdx 6y ago
  "My friend's view was, first, that privileged access, ... were so egregiously wrong it need not be discussed further." Can you dial down the snark and explain what argument you're making that doesn't fall under the above?
  - dcl 6y ago
    My apologies. To me, it seemed that labelling the ideas of privileged access and secret order types to be so egregiously wrong and not worthy of discussion a bit dismissive when there has been evidence that these sort of activies have occured before.

jlkasdfjkl 6y ago

There is no particular social benefit to such speed per se, but it does not hurt investors. The speed race is HFT market makers competing with each other to be the first to offer shares at a new price level. When one firm gets faster than others, it hurts other HFTs (because the fast firm can now get bigger market share) but not investors. HFTs do on average make a small profit on each trade: they are in the business of charging investors for liquidity. But the fierce competition between HFTs means that their margins get competed down and they cannot charge very much for liquidity. Their average profit per trade is tiny. The Taiwan stock exchange used to match orders every few seconds, like you suggest, instead of continuously. They switched to continuous trading earlier this year, and they say a little bit about why here: [0]. I might be wrong, but I think there is no rule preventing anyone from setting up a Taiwan-style batch-auction exchange in the US. Note that there are already over a dozen US stock exchanges, each with slightly different rules and order types, each competing for market share. If there's investor demand for a batch-auction exchange in the US, someone could create one and make a bunch of money running it. [0] https://www.twse.com.tw/en/page/products/trading/information13.html https://www.twse.com.tw/en/page/products/trading/information...

dllthomas 6y ago

If we quantize to one second, then either: 1) it still matters when in that second my order came in, and there's still a race, or 2) it doesn't matter when in that second my order came in, and there's an incentive to delay my order in case we learn something in that second. In either case, the details will differ quite a bit, but having the fastest connection and best tech is still an advantage.

a2h 6y ago

Yes, except half a cent per share not per trade.

pdovy 6y ago

HFT market maker here (my views are my own), there are some consequences that immediately fall out from periodic batch auctions like this. 1. There will still be a race to update your entry in the auction as close as possible to when it runs, because equity markets do not operate in a vacuum. Correlated futures markets don't operate this way (and the regulatory lift to make them do so is separate, and just as hard as doing this for equities), so there is still a race to incorporate the most up to date information ahead of a periodic auction. 2. This _will_ widen the bid-ask spread and reduce liquidity, for the following reasons. There are right now 16 distinct exchanges, excluding dark pools. As a market maker, I want to show my quote to buy/sell to as many participants as possible, and so I quote across a decent subset of these exchanges at any given time. I _don't_ want to get simultaneously filled on all these orders, and am relying on the fact that most of the time if I get filled once, I can cancel from all the other exchanges and then re-evaluate what I think the fair value of the stock is, and put out new orders reflecting that view. The more confidence I have that I can do this, the tighter a spread I can offer, and on the flip side the more risk of overfill there is, the wider I need to quote to account for that risk. In a simultaneous periodic batch auction world anyone can take all available liquidity market-wide trivially, so I have to either reduce liquidity across the market to a lower level to cap my risk, or substantially widen my quote to make that risk economically viable. Both are ultimately bad for counterparties. 3. This would likely serve to entrench existing wholesalers unless they were forced to stop crossing orders internally, or otherwise play by a stricter set of rules (and good luck with that). The vast, vast majority of retail activity never sees a public marketplace, but is executed by a wholesaler - so if you're leaving them out of this picture you're not really changing much. My personal $0.02 on this is that the latency race is just a turf war between liquidity providers, but has no real impact outside of that arena. There are other areas of needed reform: market fragmentation to the degree it exists today is a net negative IMO. Similarly the market-wide best execution requirement is just extra complexity and creates opportunities for regulatory arbitrage. The proliferation of exotic order types and "differentiating" exchange behavior adds complexity and creates opportunities to game the system. Exchanges charge exorbitant fees for access that create barriers to entry for smaller participants. To name a few.

b20000 6y ago

what social good is served by facebook? I suggest their servers are slowed down by 1 second so everyone spends less time on facebook.