4 ms·

Fine, SPEEDY gets that 200 share trade, now the order book looks like this: SELL BIG - 1000 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 Another buy o

Fine, SPEEDY gets that 200 share trade, now the order book looks like this: SELL BIG - 1000 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 Another buy order at $600 comes in and BIG makes the trade. Now the order book looks like this: SELL BIG - 800 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 At this point, SPEEDY wants to get back in so he offers 200 shares @ $600. The Order book now looks like this: Buy SPEEDY - 200 $600 SELL BIG - 800 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 So now SPEEDY is sitting behind BIG and has to wait until all 800 shares of his order soaks up the market. So, where is the problem?

jcampbell1 14y ago
You are right that the interaction is much more complicated to model correctly multi-period than either of us has described. Either way, it is clear that being faster will produce higher returns for a given algo. The question is how much. Given the extreme things HFT guys do, I think it is clear they understand a tiny increase in speed can result in handsome returns. Is this efficient for the exchange? What if the exchange traded once every 5 seconds in a blind auction, then there would be no real advantage to speed. Each computer would have 4.5-4.95 seconds to parse the auction results and post new orders. Would this exchange be more or less liquid? (I don't know, but it is interesting to think about.) The barrier to entry to be a market maker would be lower. The market making code would look more like Poker bot code, rather than what HFT does now.