5 ms·

The way the system is set up makes it a tax on global efficiency. All of these resources (crazy smart people, money, equipment) are needlessly wasted on gettin

The way the system is set up makes it a tax on global efficiency. All of these resources (crazy smart people, money, equipment) are needlessly wasted on getting lower latency when really it adds no systematic value. Instead, just as the system disallows fractional penny bids, it could discretize order times to the nearest e.g. 5 seconds. Boom. Suddenly you have more MIT/etc grads solving better problems for the world.

market_hacker 14y ago
no. that would only work if every traded product on the planet was in a single matching engine.
noname123 14y ago
Some exchanges already do that. But the issue is also liquidity not latency. When you disallow fractional penny bids and match trades at set time-interval, this causes market-makers to widen their bid/ask spread because of the inventory risk. Ideally, as a dealer you'd like to buy low and sell high and move the merchandise on your lot before the prevailing market condition moves against you. The spread even at highly liquid stocks used to be 0.10+/cents before the introduction of penny pricing and HFT; this saves money for retail investors. Also, introduction of set-time matching also means that algo's will just be tweaked to new market conditions. New arbitrage algo's will be introduced to exploit how some exchanges will be slower to react to price-actions. Predatory algo's will exploit how some institutional VWAP orders cannot be canceled quickly against volatile conditions. It's anti-virus vs. the virus writers. Oh not to mention the exchanges are in on this game, more trades mean more revenue for them. Exchanges make money by volume of trades, not by P&L of their customers; and like affiliate marketers, they actually offer liquidity rebates to any traders that offer trades that get taken at market price to boost their volume.
- bradleyjg 14y ago
  The spread even at highly liquid stocks used to be 0.10+/cents before the introduction of penny pricing and HFT; this saves money for retail investors. ---- It saves money for retail traders (i.e. fools). It has negligible effects on investors in well diversified passively managed funds.
  - noname123 14y ago
    For institutional investors, this is a very complicated question. There's always been ways that they are front-runed by more nimble traders. Currently, the state-of-art for institutional investors are to use buy-side algorithmic tools to slice and dice their orders into 100 lots and obfuscate their huge lot order (> 100,000 shares). Algo's include iceberg which continuously monitors the quotebook throughout the day and execute a portion of customer's orders when the market turns in favor of direction of the order and with an order size not to disrupt the current momentum of the stock's price action; also special darkpools are used at mutual funds such as Liquidnet where no official quotebook are maintained, instead it's more of an instant messenger tool that is limited to only mutual fund managers who chit-chat and close large block deals. Any participants who are suspected of front-running are banned. As for your original concern, yes spread of a few cents per share is very important for institutional investors when you have to execute a order for 100,000+ shares; and there's actually a whole technology vendor space in finance called transaction cost analysis that fund managers look at to see what the hidden cost of their trades are. As whether HFT actually help institutional investors, it's analogous to saying whether defense contractors help the federal government; some say it's symbiotic relationship, some say it's a parasitic relationship for all and symbiotic for some. Meaning most relationships on Wall Street like on Capital Hill, revolves around wine & dine & shifting allegiances. Quite a few HFT firms have tried to open a new line of revenue by opening up their high-speed infrastructure to institutions to execute their iceberg orders. Yet some of the HFT algorithms' intentions are to sniff out iceberg orders and front-run them.
    - tptacek 14y ago
      How do you not love the idea that large institutional investors exploit covert channels to place orders? As crazy as this sounds, this isn't an HFT thing or a modern markets thing: execution of large block trades is one of the fundamental basic problems in trading. It's just that now we're solving it with a system of dueling robots.
ricardobeat 14y ago
If Adam Smith says so. Totally agreed.
deleted 14y ago
[deleted]
- MBlume 14y ago
  I'm not sure what you're arguing for exactly, but nothing you're saying weighs against the parent statement without some serious broken window fallacy.
  - larsberg 14y ago
    Unfortunately, I can't figure out how to make the point any clearer, so I've removed it. My apologies.
traversal 14y ago
Whenever HFT comes up on HN, someone asks why we don't just remove the incentive for low latencies by matching orders less frequently. It's a fair question, but I think there are good reasons not to do this. Let's say we discretize the exchange to, say, 1 Hz, so all the orders are queued up and then executed simultaneously at the next clock tick. Now, on a given tick, there will almost always be a mismatch between the number of buy orders and the number of sell orders, so some orders will go unfilled. How do we choose which ones? (For this discussion I am ignoring price. Obviously we will fill more aggressively-priced orders first; the question is how to prioritize orders of equal price.) We could give priority to the ones that arrived first, but of course then we're back to traders racing each other. The only other scheme I can think of [1] is to fill every order in proportion to its size. So if Alice wants to sell 200 shares, Bob wants to buy 100 shares, and Charlie wants to buy 300 shares, we give 50 shares to Bob and 150 shares to Charlie. Well, this scheme has its own problems -- arguably worse ones than the current system! If Bob really wants to buy 100 shares, and expects to be competing with Charlie, he has an incentive to place a much bigger order: in this case, if he knew Charlie's bid size, he would also ask for 300 shares, expecting to get 100. Of course, Charlie will be playing the same game and inflating his own bid size. The equilibrium is that everyone asks for way more size than they actually want. There are two things wrong here: 1. Traders are spending mental energy trying second-guess each other's order size; those who don't are crowded out of the most competitive (and, typically, profitable) trades. 2. Since traders can't guess correctly every time, they will sometimes end up buying or selling much more than they want, which means they have to turn around and do the opposite trade, paying the spread in the process. If this happens during during a large price movement, these traders can lose even more money, and in their haste to reverse their trades, they will drive the market even further in the same direction. And by the way, this is not just speculation. While I'm not familiar with any exchanges that discretize their clocks this way, there is a product with a similar system: the CME Eurodollar contract [2]. In this contract, unlike the other futures products traded on the CME, resting orders do not execute on a first-come-first-served basis; instead they are allocated "pro rata", or in proportion to their size, much as I described above. Based on my conversations with several people who trade them (including HFTers), the results are also as I described: traders routinely over-order and suffer the consequences. Hopefully this sheds some light on why this seemingly obvious solution is not widely implemented. [1] Of course I can think of many other schemes, but they either have obvious problems or basically reduce to this one. [2] There are other products matched this way, but I'm not as familiar with them.

market_hacker 14y ago

no. that would only work if every traded product on the planet was in a single matching engine.

noname123 14y ago

Some exchanges already do that. But the issue is also liquidity not latency. When you disallow fractional penny bids and match trades at set time-interval, this causes market-makers to widen their bid/ask spread because of the inventory risk. Ideally, as a dealer you'd like to buy low and sell high and move the merchandise on your lot before the prevailing market condition moves against you. The spread even at highly liquid stocks used to be 0.10+/cents before the introduction of penny pricing and HFT; this saves money for retail investors. Also, introduction of set-time matching also means that algo's will just be tweaked to new market conditions. New arbitrage algo's will be introduced to exploit how some exchanges will be slower to react to price-actions. Predatory algo's will exploit how some institutional VWAP orders cannot be canceled quickly against volatile conditions. It's anti-virus vs. the virus writers. Oh not to mention the exchanges are in on this game, more trades mean more revenue for them. Exchanges make money by volume of trades, not by P&L of their customers; and like affiliate marketers, they actually offer liquidity rebates to any traders that offer trades that get taken at market price to boost their volume.

bradleyjg 14y ago
The spread even at highly liquid stocks used to be 0.10+/cents before the introduction of penny pricing and HFT; this saves money for retail investors. ---- It saves money for retail traders (i.e. fools). It has negligible effects on investors in well diversified passively managed funds.
- noname123 14y ago
  For institutional investors, this is a very complicated question. There's always been ways that they are front-runed by more nimble traders. Currently, the state-of-art for institutional investors are to use buy-side algorithmic tools to slice and dice their orders into 100 lots and obfuscate their huge lot order (> 100,000 shares). Algo's include iceberg which continuously monitors the quotebook throughout the day and execute a portion of customer's orders when the market turns in favor of direction of the order and with an order size not to disrupt the current momentum of the stock's price action; also special darkpools are used at mutual funds such as Liquidnet where no official quotebook are maintained, instead it's more of an instant messenger tool that is limited to only mutual fund managers who chit-chat and close large block deals. Any participants who are suspected of front-running are banned. As for your original concern, yes spread of a few cents per share is very important for institutional investors when you have to execute a order for 100,000+ shares; and there's actually a whole technology vendor space in finance called transaction cost analysis that fund managers look at to see what the hidden cost of their trades are. As whether HFT actually help institutional investors, it's analogous to saying whether defense contractors help the federal government; some say it's symbiotic relationship, some say it's a parasitic relationship for all and symbiotic for some. Meaning most relationships on Wall Street like on Capital Hill, revolves around wine & dine & shifting allegiances. Quite a few HFT firms have tried to open a new line of revenue by opening up their high-speed infrastructure to institutions to execute their iceberg orders. Yet some of the HFT algorithms' intentions are to sniff out iceberg orders and front-run them.
  - tptacek 14y ago
    How do you not love the idea that large institutional investors exploit covert channels to place orders? As crazy as this sounds, this isn't an HFT thing or a modern markets thing: execution of large block trades is one of the fundamental basic problems in trading. It's just that now we're solving it with a system of dueling robots.

ricardobeat 14y ago

If Adam Smith says so. Totally agreed.

deleted 14y ago

[deleted]

MBlume 14y ago
I'm not sure what you're arguing for exactly, but nothing you're saying weighs against the parent statement without some serious broken window fallacy.
- larsberg 14y ago
  Unfortunately, I can't figure out how to make the point any clearer, so I've removed it. My apologies.

traversal 14y ago

Whenever HFT comes up on HN, someone asks why we don't just remove the incentive for low latencies by matching orders less frequently. It's a fair question, but I think there are good reasons not to do this. Let's say we discretize the exchange to, say, 1 Hz, so all the orders are queued up and then executed simultaneously at the next clock tick. Now, on a given tick, there will almost always be a mismatch between the number of buy orders and the number of sell orders, so some orders will go unfilled. How do we choose which ones? (For this discussion I am ignoring price. Obviously we will fill more aggressively-priced orders first; the question is how to prioritize orders of equal price.) We could give priority to the ones that arrived first, but of course then we're back to traders racing each other. The only other scheme I can think of [1] is to fill every order in proportion to its size. So if Alice wants to sell 200 shares, Bob wants to buy 100 shares, and Charlie wants to buy 300 shares, we give 50 shares to Bob and 150 shares to Charlie. Well, this scheme has its own problems -- arguably worse ones than the current system! If Bob really wants to buy 100 shares, and expects to be competing with Charlie, he has an incentive to place a much bigger order: in this case, if he knew Charlie's bid size, he would also ask for 300 shares, expecting to get 100. Of course, Charlie will be playing the same game and inflating his own bid size. The equilibrium is that everyone asks for way more size than they actually want. There are two things wrong here: 1. Traders are spending mental energy trying second-guess each other's order size; those who don't are crowded out of the most competitive (and, typically, profitable) trades. 2. Since traders can't guess correctly every time, they will sometimes end up buying or selling much more than they want, which means they have to turn around and do the opposite trade, paying the spread in the process. If this happens during during a large price movement, these traders can lose even more money, and in their haste to reverse their trades, they will drive the market even further in the same direction. And by the way, this is not just speculation. While I'm not familiar with any exchanges that discretize their clocks this way, there is a product with a similar system: the CME Eurodollar contract [2]. In this contract, unlike the other futures products traded on the CME, resting orders do not execute on a first-come-first-served basis; instead they are allocated "pro rata", or in proportion to their size, much as I described above. Based on my conversations with several people who trade them (including HFTers), the results are also as I described: traders routinely over-order and suffer the consequences. Hopefully this sheds some light on why this seemingly obvious solution is not widely implemented. [1] Of course I can think of many other schemes, but they either have obvious problems or basically reduce to this one. [2] There are other products matched this way, but I'm not as familiar with them.