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How else would you do it? At random? Why would that be better?
by growse 15y ago
How else would you do it? At random? Why would that be better?
- jcampbell1 15y agoPossibly. It would stop the arms race that adds little value to the economy. The same arms race happened in the pits, except it was height, not latency. It seems a bit ridiculous that a taller trader would make more money that a smarter one, and that a faster algorithm makes more money than a smarter one.
- kiba 15y agoIntelligence is also a function of speed. All else being equal, a faster solver will win over the slow one. A faster learner will accumulate much more knowledge in less time. In warfare, it pays to react faster than your opponents. You don't have time to think slowly about how you're going to shoot. You'll just have to shoot accurately and utilize tactics that you already know.
- yummyfajitas 15y agoMuch like warfare, the race to trade is a zero sum game. Either Leela or Bender is going to provide liquidity, but no one (besides Leela and Bender) cares which one does. There is no compelling social reason why we should reward smarts in this case.
- jcampbell1 15y agoShould all the spoils of market making go to the fastest trader, or should the trader who is willing to offer the most volume be rewarded? The goal is liquidity, and it is not obvious which answer is best. Don't dismiss the tradeoff. At any rate, the current system is much better than rewarding the tallest guy with the ugliest jacket.
- deleted 15y ago[deleted]
- tptacek 15y agoIt would stop one arms race and replace it with another: firms would crowd the books with more orders to increase the number of fills allocated to them.
- jcampbell1 15y agoIsn't more shares available on the books the goal? You are describing an arms race that would be beneficial. Pro-rata based on order size, or a weighted lottery will work out the same over time, except a random lottery doesn't have the problem of clearing tons of tiny trades. Now since speed is no longer a barrier to entry, the spoils will go to the people willing to provide the most liquidity.
- tptacek 15y agoThe books don't hold "shares", they hold "orders". The spoils are supposed to go to the people willing to provide the most liquidity; the "spoils" you're referring to are "the expense involved in executing orders".
- jcampbell1 15y ago"orders" contain the price and the number of shares. Let's not split hairs here. No one cares about the absolute number of orders, but rather the total number of shares/contracts/etc available at each price. By spoils, I mean the returns to market making. Right now market makers are largely rewarded for being the fastest and beating out other market makers rather than for providing the most liquidity to speculators/investors.
- tptacek 15y agoHow can a market maker be the fastest without providing liquidity? An HFT market maker's willingness to buy XYZ from Alice at $10/shr to allow her out of her XYZ position is practically the definition of liquidity; its willingness to turn around and sell XYZ at $10.05/shr to Bob is more liquidity still. Alice wants to sell and can do so immediately and at a price she accepts; Bob wants to buy and can do so immediately at a price he accepts. That's liquidity. The markets do not do that automatically. Before automated trading, Alice could sell, but would probably have had to do so at significantly less than $10/shr, even if the market was indicating $10 was the true price of XYZ. Bob could buy, but would probably have to do so at significantly more than $10.05/shr. The primary reason for that: human beings skimming from Alice and Bob, because there was no effective way to compete.
- ddlatham 15y agoDecrease the minimum bid increment from $0.01 to a value such that ties are rare.