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, bu

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.