3 ms·

As far as I can tell, the commonality among those always-winning firms is high frequency low latency algorithmic trading. These days it takes millions of dollar

by btilly 6y ago

As far as I can tell, the commonality among those always-winning firms is high frequency low latency algorithmic trading. These days it takes millions of dollars per month just to pay for the infrastructure you need to be able to be competitive - and then you also have to have some nontrivial edge, without which there isn’t all that much profit in having low latency. And that is why I like the idea of a "trade arbitrarily slowly with limited price change" market versus the current approach of "trade fast with an arbitrary price change" market. See https://news.ycombinator.com/item?id=24760841 https://news.ycombinator.com/item?id=24760841 for an explanation of how the trade arbitrarily slowly market could work. Under normal conditions, it would look a lot like the current market does. Except that you're paying less to the HFT folks. What I didn't describe there is that you could even have a chain of slower and slower markets. With a maximum rate of price change varying from 1% per day to 1% per minute. With the idea that ordinary folks would trade on the 1% per minute market while large institutional orders would be likely to go in the 1% per day market. (And when the price of two markets cross, open orders on the one can match as open orders on the other.)

lixtra 6y ago
What happens if your slow market has to coexist with other fast markets? My understanding is that a) either there is a huge price lag to the fast market and say you offer some good cheaper that the fast market. Then the HFT would come and buy your stuff and sell it more expensive on the fast market. Until b) your market becomes illiquid. In both cases there is little incentive to use your market. It would only make sense for huge trades (similar to take over offers, etc).
- btilly 6y ago
  It depends on where the slow market is relative to the bid-ask spread in the fast market. If the slow market is outside of the bid-ask spread, then HFT will be happy to move the price to the bid-ask spread. So you're liquid in the direction that moves the price to where it needs to be and not liquid in the other direction. If the slow market is inside of the bid-ask spread, then HFT is likely to be willing to buy/sell on the fast market and complete the other half of the trade on the slow market. That is, they don't snap up the slow order right away, but they will snap it up to complete trades. Getting a guaranteed trade is better than holding the stock and not trading. This gives liquidity in both directions. The incentive to use this market for smaller orders is that you are likely to get a price somewhere between the bid-ask spread. I don't have recent data, but a decade ago the bid-ask spread for small stocks was around 2%, lowering to 0.6% for the top 20% of stocks. (As you go to the behemoths, the spread drops farther.) I'm sure it is smaller today, but if you are a day trader, that spread is a hidden tax that is going to kill you over time. Even if nobody used the slow market, HFT would guarantee that you get no worse than the spread on a market order. But when traders use the slow market directly, they bypass the HFT middleman and save themselves money.
  - thedufer 6y ago
    > So you're liquid in the direction that moves the price to where it needs to be and not liquid in the other direction. "liquid in one direction" is a nice way of saying that no trades are happening, which is to say illiquid. > If the slow market is inside of the bid-ask spread, then HFT is likely to be willing to buy/sell on the fast market and complete the other half of the trade on the slow market. This seems to hinge on an unrealistic model of HFT as perfect-arbitrage machines that need to immediately close positions. In fact, it would be quite surprising if they were willing to do this, based on how they currently behave. If they were willing to close the loop like that, they would equivalently be willing to do it on existing exchanges, which they could do by posting an order inside the spread (which would, of course, shrink the spread). The fact that that is described as "inside the spread" is a pretty clear indicator that they are not doing this. > The incentive to use this market for smaller orders is that you are likely to get a price somewhere between the bid-ask spread. The reason that you don't currently get filled "between the bid-ask spread" is that the whole point of the spread is that it is the region inside which no one is currently willing to trade. If they were, the spread would be smaller. By what magic are they willing to trade inside the spread on your exchange, but not on traditional ones?
skipants 6y ago
Is this similar to Investor's Exchange? https://iextrading.com/ https://iextrading.com/ Similar principle... IIRC it delays execution to try and prevent HFT. A big part of Flash Boys by Michael Lewis was chronicling the history of what led to this exchange being created.
- btilly 6y ago
  They are solving the same problem in a very different way. They take away a lot of the tools that HFT uses to increase their edge, simplify the ordering structure, and try to make as many trades as possible to be between traders instead of the HFT market makers. But they have not fundamentally redone the structure of orders such that prices are guaranteed to move slowly at the cost of indefinite delays in execution.

by btilly 6y ago

lixtra 6y ago

What happens if your slow market has to coexist with other fast markets? My understanding is that a) either there is a huge price lag to the fast market and say you offer some good cheaper that the fast market. Then the HFT would come and buy your stuff and sell it more expensive on the fast market. Until b) your market becomes illiquid. In both cases there is little incentive to use your market. It would only make sense for huge trades (similar to take over offers, etc).

btilly 6y ago
It depends on where the slow market is relative to the bid-ask spread in the fast market. If the slow market is outside of the bid-ask spread, then HFT will be happy to move the price to the bid-ask spread. So you're liquid in the direction that moves the price to where it needs to be and not liquid in the other direction. If the slow market is inside of the bid-ask spread, then HFT is likely to be willing to buy/sell on the fast market and complete the other half of the trade on the slow market. That is, they don't snap up the slow order right away, but they will snap it up to complete trades. Getting a guaranteed trade is better than holding the stock and not trading. This gives liquidity in both directions. The incentive to use this market for smaller orders is that you are likely to get a price somewhere between the bid-ask spread. I don't have recent data, but a decade ago the bid-ask spread for small stocks was around 2%, lowering to 0.6% for the top 20% of stocks. (As you go to the behemoths, the spread drops farther.) I'm sure it is smaller today, but if you are a day trader, that spread is a hidden tax that is going to kill you over time. Even if nobody used the slow market, HFT would guarantee that you get no worse than the spread on a market order. But when traders use the slow market directly, they bypass the HFT middleman and save themselves money.
- thedufer 6y ago
  > So you're liquid in the direction that moves the price to where it needs to be and not liquid in the other direction. "liquid in one direction" is a nice way of saying that no trades are happening, which is to say illiquid. > If the slow market is inside of the bid-ask spread, then HFT is likely to be willing to buy/sell on the fast market and complete the other half of the trade on the slow market. This seems to hinge on an unrealistic model of HFT as perfect-arbitrage machines that need to immediately close positions. In fact, it would be quite surprising if they were willing to do this, based on how they currently behave. If they were willing to close the loop like that, they would equivalently be willing to do it on existing exchanges, which they could do by posting an order inside the spread (which would, of course, shrink the spread). The fact that that is described as "inside the spread" is a pretty clear indicator that they are not doing this. > The incentive to use this market for smaller orders is that you are likely to get a price somewhere between the bid-ask spread. The reason that you don't currently get filled "between the bid-ask spread" is that the whole point of the spread is that it is the region inside which no one is currently willing to trade. If they were, the spread would be smaller. By what magic are they willing to trade inside the spread on your exchange, but not on traditional ones?

skipants 6y ago

Is this similar to Investor's Exchange? https://iextrading.com/ https://iextrading.com/ Similar principle... IIRC it delays execution to try and prevent HFT. A big part of Flash Boys by Michael Lewis was chronicling the history of what led to this exchange being created.

btilly 6y ago
They are solving the same problem in a very different way. They take away a lot of the tools that HFT uses to increase their edge, simplify the ordering structure, and try to make as many trades as possible to be between traders instead of the HFT market makers. But they have not fundamentally redone the structure of orders such that prices are guaranteed to move slowly at the cost of indefinite delays in execution.