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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 s

by 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?

by lixtra 6y ago

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?