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Thoughts on low latency trading if exchanges went full cloud

189 points by arcza 2y ago

notyourwork 2y ago
Nothing to add but I found this to be a well written thought exercise on a space I realize I know very little technical detail of. Thanks for writing this!
- arcza 2y ago
  Thank you. I'm only happy to hear this was helpful. I'd also love comments from any HDL quants about how portable FPGA code would be to virtualized environments and what other languages might stand out particularly well for a VM stack.
  - pclmulqdq 2y ago
    There are cloud FPGAs, but they are offered as a compute accelerators, and have no access to the network. Trading FPGAs need network access for latency.
    - KiranRao0 2y ago
      Im also sure that if theres enough customer demand (from people willing to spend $M), AWS will make network connected FPGA happen.
      - pclmulqdq 2y ago
        I'm sure they won't, at least without a lot of development. FPGA networking used for trading is borderline abusive of networking protocols, and I assume that Amazon doesn't want that on their production network.
h4kor 2y ago
I'm a total trading noob. Can you explain why a low latency is worth so much? And how these traders "exploit" that advantage to make a profit?
- sgarland 2y ago
  Reaction time to events, be it news, securities movements, etc. If you’re early, you can open positions before large movement has taken place; you can also close those positions precisely when you want. Sometimes this may be making pennies (x N shares), other times it may be quite substantial.
- re-thc 2y ago
  A delay could impact the price. Say you wanted it at $5.00 but it becomes $5.01 by the time your bid comes in you either miss out or pay more. These traders do it at high frequency. Imagine $0.01 x millions at a time.
- smabie 2y ago
  What would you do if you knew the price of something 1 day before everyone else? How would you make money off that?
- lotsofpulp 2y ago
  In any market, a seller or buyer willing to close the transaction quicker is a benefit for the opposing seller or buyer. Quicker can be on the scale of years to milliseconds, depending on what is being exchanged and amongst whom.
- washedup 2y ago
  This is extremely simplifying the nuance, but imagine there are two traders who want to buy what a single trader is willing to sell at a given price? Well, the first one to get to the exchange and "lift the offer" will get the price, while the second trader will have to pay a higher price.
- ioblomov 2y ago
  High-frequency trading is essentially a low-margin, high-volume play that exploits small price differences for profit. The most obvious example would be arbitraging the same security on different exchanges (buying low on one and selling pennies higher on another). Similarly, algorithmic models could exploit price volatility for individual securities on the same exchange. Under such conditions, fractions of a second can determine whether a given trade is a winning or losing one.
KiranRao0 2y ago
One key consideration is “provable fairness”. It’s my understanding that exchanges use techniques like long, same length fiber optic cables to all racks within the exchange datacenter to convince customers that everyone is on a fair playing field. This is a lot harder to do when a server is virtualized somewhere on some rack on EC2. Exactly as mentioned, people will try to optimize by spinning up/down instances as close to the exchange server as possible. Customers will be unhappy because they can’t prove that it’s fair, even if they have the closest server. Overall great, thought provoking writing btw
- re-thc 2y ago
  > This is a lot harder to do when a server is virtualized somewhere on some rack on EC2. There are bare metal EC2 instances.
  - checker659 2y ago
    It's about the interconnect and the proximity.
    - blibble 2y ago
      and not having a for() loop doing multicast fanout in software which sounds like what AWS Transit Gateway is
  - Shrezzing 2y ago
    At some point, someone has the shortest route connecting to the exchange's bare metal EC2 instance, and that organisation has a significant advantage in high frequency trading.
- aynyc 2y ago
  It's provable that it's not fair. AWS multicast is software based, not hardware based.
  - vegardx 2y ago
nhourcard 2y ago
About the market data & monitoring element, beyond the usual suspects Clickhouse and kdb+ - worth noting that Aquis mentioned in this article uses QuestDB ( https://questdb.io/case-study/aquis/ https://questdb.io/case-study/aquis/)
pas 2y ago
... is there some movement toward "upload the strategy and let the exchange run it"? which would provide a more level playing field, reduce energy and hardware costs, etc?
- dchftcs 2y ago
  You mean enabling arbitrary code execution from a third party when you can lose billions of people's money in half a second? Also if two people want to make the same trade, who gets it? Exchanges do provide very limited special conditional execution instructions such as peg orders or stop orders, but it seems like a hard problem for them to support anything more sophisticated and general.
  - infecto 2y ago
    I agree with your sentiment but I would clarify that historically some exchanges did indeed create custom order types for larger clients that were not always public knowledge. I think that has mostly been eliminated but there are still a range of unique order types you can utilize depending on the exchange.
  - pas 2y ago
    It doesn't have to be arbitrary machine code. eBPF / WASM coupled with a standard library supplied by the exchange. (Plus the exchange can run it in a VM.) > Also if two people want to make the same trade, who gets it? Whoever pays more currently, right? So it can be uniform random and folks can pay for better than random chance, etc.
    - smabie 2y ago
      Or we could just.. not do that? It provides no benefit and a host of downsides
      - pas 2y ago
        It seems a lot more elegant/efficient/sane to me than trying to squeeze more and more racks into one building. So that's why I'm asking, as I think the benefits are clear, much better scalability, fairness (or getting as close to it as the exchange wants), cheaper (no need for fancy hardware), probably it would attract more market participants (lower barriers to entry). It's the same hypothetical "EC2 model" without the meta-game of trying to get closer to the cores the exchange runs at a given time. Can you elaborate on the downsides besides security?
jstsch 2y ago
Nice article. Wondering though why trading is not done in discrete batches, e.g. 5 second intervals? Trades in the same interval get filled equally or stochastically? Info about trades with that same 5 second batch delay? Is there some (theoretical) market efficiency thing at play? All this HFT feels wasteful and bad for 'regular' human investors.
- snapcaster 2y ago
  I guess the argument would be that this limits price discovery? I hear this proposed a lot and haven't heard super compelling arguments against it
  - marcosdumay 2y ago
    The reason the GP is proposing it is because it limits price discovery. IMO, if you have a problem with limiting it to 5 seconds long quanta, you are doing something wrong.
- Tesl 2y ago
  This is how the Taiwan exchange used to do matching, and I still think it's the best system I've seen. I don't think the reason has anything to do with price discovery, it's just because exchanges want to maximise their trading fees. Continuous order book trading leads to more trades and hence more profit for the exchange.
  - sparsely 2y ago
    They also charge differently (extortionately, some might say) for different speeds of data feed, although I'm not sure if they have tiers just for HFTs.
- ramon156 2y ago
  Shareholders would fume hearing this
- sparsely 2y ago
  The HFT is wasteful but isn't bad for human traders, they tend to get better prices. It's bad (sometimes) for huge investors (VHNW individuals, hedge funds, pension funds which I guess represent regular people) that want to make large trades without moving the market but there are also winners here - e.g. if Johnny the day trader buys a stock that Texas Teachers Fund is selling huge batches of, he's better off if HFTs are causing price changes to propagate more quickly.
yafetn 2y ago
Interesting read, thanks! Some points: > Hogging instances might pay, if this stops competitors getting good hosts. This would eat into PnL and is also wasteful on energy. Aren’t reserved instances cheaper than spot? > Bad players could do a ping test to many thousands of EC2 instances, find those which are also at very low latency to their good boxes (assuming these are competitors), and DDoS them during trading hours to hammer the hypervisor’s NIC. This would result in critical overhead occurring for competitors sending orders out. Leaving out the logistics of how someone could do this (why are your instances reachable from the internet?), wouldn’t you have a good case with your exchange to get them kicked out?
- onionisafruit 2y ago
  > wouldn’t you have a good case with your exchange to get them kicked out? Would you know who is doing the pinging? The cloud provider would know what account was pinging, but somebody doing this as a trading tactic would have the resources to churn through aws accounts as quickly as they are banned.
Samuel_w 2y ago
[flagged]
_benj 2y ago
This is an interesting read but I think it leaves outside what kind of trading is the one that would benefit from ULL. ULL and currently HFT seems to be very useful for market making (buying the ask and selling the bid and profiting from the bid-ask spread making parts of a cent per transaction, done a few million times a day), but there are other uses for HFT. One of them would be to execute very big orders over time to instead of drastically rising the price of the security they can get a better cost basis by performing a set of trades, letting the market absorb the impact and continuing with the order. The thought of having the market in a cloud provider like AWS scares me! Although I’m sure that AWS might have pitched the idea already. If the markets could be controlled by a private company that could schedule “maintenance” at convenient times for them, that sounds like a recipe for market manipulation bay trillion dollar company. Sounds like something the SEC wouldn’t stand for.
- minimax 2y ago
  Your description of market making is backwards. If you're buying the ask and selling the bid, you're paying the spread not collecting it.
  - _benj 2y ago
    Thanks for the correction!
onionisafruit 2y ago
If a big exchange goes to the cloud it won’t look like a regular company setting up an aws account and getting a bunch of ec2 instances in us-east-1. They would at least have dedicated racks. I suspect the provider would end up with a plan where traders can get servers that all have the same network distance from the exchange’s nics (down to the same length of fiber).
- SamuelAdams 2y ago
  Honestly for something this niche I wonder if AWS would make a new region, like gov-cloud or secret. The goal would be to use tech that can accommodate ULL deployments.
  - posnet 2y ago
    This seems to the most likely, and it's not unheard of, they have 'local regions' like osaka in Japan. Alternatively they could just stick a bunch of Outpost racks in the NYSE/NASDAQ data center and create an 'eXn.8xlarge' instance type and charge 100$ an hour.
- kikimora 2y ago
  I think and exchange would use AWS Outposts to get hardware in their data center.
- gpderetta 2y ago
  But at that point it would be just another colo, right?
minimax 2y ago
> The NYSE runs out of a public data centre (called NY4) which is run by Equinix. No. NY4 is in Secaucus. NYSE operates out of an ICE (NYSE parent co) owned facility in Mahwah about 25 miles north of there. They managed to pick out the one big US equities exchange operator _not_ running in an equinix facility. Sorry but this whole post sounds like someone who is sort of HFT adjacent but doesn't really know what they are talking about. Sending orders at "09:29:59.9999971 at the hope your order arrives at 100ns past 9.30am." What?
- pclmulqdq 2y ago
  > Sending orders at "09:29:59.9999971 at the hope your order arrives at 100ns past 9.30am." What? This literally does happen, though. One of the things the hyperscalers have convinced the world is that precise time is hard. Precise time is easy if you are willing to pay extra for your hardware. Sub-10-ns precision is unremarkable when you use PTP.
  - minimax 2y ago
    It doesn't happen. All the exchanges have a "Day" order type that you can send before 9:30 that will be live on the book when it opens at 9:30 (or transitions to the "core" session at 9:30, most US exchanges have a premarket session prior to that). The idea of having some sophisticated strategy that sends 100ns before 9:30 is nonsense.
    - pclmulqdq 2y ago
      As far as I know, you're correct that this exact trade probably doesn't happen on the US exchanges - day orders do have a matching phase before market open, so it may be advantageous to slide in right afterward, but you likely wouldn't do it without knowledge of the state of the opening auction. However, sending things just a hair early for scheduled events to catch an exact time is a pretty well-known trick at this point. I remember complaining to the exchange that their clocks weren't precise enough for this to be reliable.
kwhitefoot 2y ago
Low latency trading should be forbidden. The exchanges should add random amounts of latency to every trade.
- infecto 2y ago
  Why? Historically spreads have been much wider, I for one appreciate how close they trade now. Instead of a guy on the floor taking dollars from you, you have a bot taking pennies. Even large funds like Vanguard have said that the current system has reduced costs in net.
  - arcza 2y ago
    > Instead of a guy on the floor taking dollars from you, you have a bot taking pennies. ^ excellent way to put it
- smabie 2y ago
  They do it's called exchange jitter. And you still have HFT
  - kwhitefoot 2y ago
    Add more jitter.
deleted 2y ago
[deleted]
RyanHamilton 2y ago
There's no directly colocated hosting that I know of, but "direct connect" gets you close: https://www.equinix.co.uk/partners/aws https://www.equinix.co.uk/partners/aws
jwie 2y ago
Orders should have some durability and it would probably change behaviors enough to make hft go away. If you list a buy or sell order it just has to be in force for some period of time, say a minute or something. HFT shops will say this would reduce liquidity, but it would only make clear what real liquidity was in the first place.
- tourist2d 2y ago
  Why would anyone want that? Everyone would just quote a lot wider to make up for the potential volatility of the next minute, probably leading to worse trades for retail orders.
- smabie 2y ago
  If orders has to been good for atleast a minute it would massively increase the spread (by like over a 1000x probably) Also, what's wrong with hft?
- rfoo 2y ago
  Will you put an order 1 minutes before financial statements, then? If so, at what price? If no, knowing that there will be no liquidity in the very last minute before financial statements, will you put an order 2 minutes before? This won't propagate forever, but is going to bring very complicated changes.
TacticalCoder 2y ago
How would any cloud offering deal with something like, say, the full options data feed, which is close to 40 Gb/s of binary packed goodies? You need both a very fat pipe and ultra-low latency: does the cloud, any cloud, offer that? Also: how often have you guys seen the stock market being down? What's the "x nines" availability of, say, the US stock market and US options feed? Now: do we wanna talk about the various cloud outages that made the news? Sometimes lasting hours? Also what I've seen with the cloud is websites are now displaying spinners everywhere, for the myriad of not-low-latency-at-all microservices often taking seconds to respond. And that'd be on an ultra low latency fiber to the home setup, with 2 Gb/s down (and the ISP really supporting that). Why the heck do I have to wait seconds for oh-so-many things to display in my browser, on a last gen Ryzen ultra-speedy machine, with a super fat and low-latency Internet pipe? The worst offenders being all those banking websites showing a balance of 0 instead of "-" or "n/a" while fetching my info: nearly gives me heart attack every single time. I take it it has to do with micro-services all contacting shitloads of other micro-services, all living in the not-low-latency cloud. The problem being compounded by an army, a generation, of programmers who have never learned anything about optimization or latency and who solve every problem they have with the only hammer they have: the cloud. All these programmers know are JSON (or, worse, XML)... I mean: JSON vs 40 Gbit/s of interrupted bit-packed binary feeds? How could these two world ever reconcile? Now I don't do HFT but I do trade options and I do it through a desktop app and that app also offers an API through which I can fetch prices, send orders, etc. It's a good old Java app. And it's more advanced than any website I've ever used. Can we please not enshittify everything with countless micro-services and JSON files in the cloud?
- __alexs 2y ago
  Only someone that both misunderstands microservices and HFT architectures could have this opinion. 100 Gb/s is possible on AWS via Direct Connect.
- smabie 2y ago
  What does cloud have to do with micro services and json? Crypto exchanges already run on the cloud and it works.. mostly fine?
- 2y ago
JackMorgan 2y ago
IEX Exchange is building a cloud-first stock exchange that uses the concept of "slowed trading" to eliminate some of the worst practices of HFT. They even use a 38 mile loop of fiber to slow down connections that are "too close". https://en.m.wikipedia.org/wiki/IEX https://en.m.wikipedia.org/wiki/IEX
- pclmulqdq 2y ago
  I'm not sure IEX is cloud-first, that would be a recent development. Their 38 mile fiber gimmick is also kind of silly because they have to provide data to a consolidated feed with no delay.
netfortius 2y ago
See Morningstar's choice of being among the first customers of AWS Outpost.
- aynyc 2y ago
  Outpost is literally a AWS branded server rack that is installed into a data center, I don't think it's considered "cloud" in modern stack.
  - netfortius 2y ago
    The end-to-end infrastructure (and parts of PaaS delivered within Outpost, from within the set of AWServices) is in fact a cloud "extension", with an on-prem leg, NOT an on-prem solution connected to the cloud. There are a lot of constructs which force the AWS cloud products/services usage, not the traditional on-prem ones.
    - aynyc 2y ago
      The outpost deployment in financial services that I've seen is the opposite in cloud extension. These companies want to say they are cloud-enabled, rather than push a full stack onto the AWS regions, they essentially buy AWS outpost rack as a way to extend their on-prem environment to the cloud (mainly S3).
allenrb 2y ago
Fun thought exercise, thanks! My question is, what advantage would a large exchange find in moving to cloud? They’ve already got the personnel capable of managing their environment. They’re not a rapidly-growing startup in need of flexibility. They’re large enough to get at least decent deals purchasing gear. “The cloud” will naturally expect to make a profit on the deal, which likely eats up (and then some) any savings which might otherwise be delivered. I “get” cloud in a lot of circumstances but it doesn’t seem to make much sense here.
- SJC_Hacker 2y ago
  Without reductions in personnel, then none. That's essentially what you're buying from a cloud provider. Most of the time its not so much renting the hardware as renting their labor in maintenance. That is assuming your hardware needs don't have a wide enough variance from time to time (scale up/scale down)
posnet 2y ago
The biggest current limitation with cloud providers when it comes to exchange tech is the lack of real multicast support. It is rare outside of exchanges, but extremely low latency L1 multicast market data has become the backbone of exchanges, both for fairness and for scalability. Knowing you can saturate your entire network with 10G traffic and every participant will get the same market data packets at the same time[0], and there will be zero queuing or bottlenecks is very hard to do otherwise. There is a pretty good podcast episode about it out of Jane Street[1]. I know AWS have 'multicast support' but last time I tested it, it was clearly just uni-cast traffic with a software switch doing fan-out/copying, I assume using the same tech as their transit gateway, I think it was called hyperplane or something. [0]: for some definition of the same time, at least low enough that you can't measure it without equidistant optical splitters or White Rabbit synced devices. [1]: https://signalsandthreads.com/multicast-and-the-markets/ https://signalsandthreads.com/multicast-and-the-markets/
- secondcoming 2y ago
  > lack of real multicast support Yup, this is a problem for us in GCP today even outside of trading. I don't know how Pub/Sub works for them.
  - pclmulqdq 2y ago
    Pub/sub systems in unicast-only environments are very complex distributed systems to handle the load involved in fan-out routing while maintaining a global order. I had an interviewer once get annoyed with me for suggesting using multicast to solve the fan-out part of a pub/sub system, which made the global ordering part small and simple. We lost a lot by thinking of HTTP as the one true level of network abstraction.
    - amluto 2y ago
      A reliable multicast network that preserves global order even during maintenance and doesn’t drop packets is not something you will find off the shelf. A reliable multi-tenant multicast network also appears to be a rare beast. I’ve only heard of it in finance, and that’s only because it’s private and expensive and all the participants need to be generally nice to each other because it’s a repeated game and the operator can literally pull the plug if the rules are broken.
dusted 2y ago
Showing that I don't understand economics while also telling that I don't understand economics: It would probably do the world more good to tweak the structures making ULL trading profitable anyway, it's not like the trading in and of itself brings any value to the broader world, while consuming enormous amounts of resources that could have been spent on actually improving systems that create real value.
- cosmic_quanta 2y ago
  > it's not like the trading in and of itself brings any value to the broader world This is a common sentiment, but the reality is that increasing market participation is good for everyone. Yes, even retirement funds benefit from the presence of market-makers. Liquid markets allow for better price discovery and cheaper transaction costs.
  - dusted 2y ago
    I specifically the high-speed trading. I definitely agree that actual investment and trading has some benefit. Nobody was helped by the 200 nanosecond thing that the machines did when the marked opened (except the owners of said machines, of course)
    - johngladtj 2y ago
      Plenty you people were, you just don't notice it.
    - andruby 2y ago
      What if collectively those ULL and HFT orders help stabilise the market. Then I would say, yes, "we, the world" are being helped.
- hackerlight 2y ago
  Riddle me this. If you got what you wanted, and these value destroying people went away, what would they be replaced with?
sesuximo 2y ago
If an exchange goes to AWS, would it suddenly look worse than its competitors? And would that hurt the exchange’s revenue?
hoseja 2y ago
Cloud of rapidly expanding ionized gasses, yeah.
eschneider 2y ago
Why on earth would exchanges go full cloud when running the trading infrastructure reliably and predictably is their whole reason for existing?
mcconaughey 2y ago
At first glance, it seems this would even the playing field. However, large players will allocate resources to spinning up instances and overloading machines. Similar to how we're seeing the DDOS shenanigans going on in crypto. Net-net, it still benefits startup quant shops and sophisticated independents. Most retail isn't doing HFT or really any quant. But for people wanting to have their own shops, this is a better version than having to build hardware and colo.
hn8305823 2y ago
It's amazing to me that regulators have not required a minimum latency, or random latency dispersion in orders/trades to level the playing field.
- gpderetta 2y ago
  Should they also require a F1-like cap on FLOPS for offline model fittings? A limit on bandwidth? What about quant compensation?
kjkjadksj 2y ago
Lets start with exchanges allowing for trades during roman catholic holidays
SkipperCat 2y ago
Why would the exchanges want to move their colos into the cloud. They've spent the capex and they can charge lots of money to rent data center space, cross connects and other services to their customers. If they moved to the cloud, all that revenue would go from them to AWS/GCP/etc. Doesn't seem like a profitable move for the exchanges. They make more $$$ with on prem setups.
- lulznews 2y ago
  Somebody needs a project to get promoted …
kristjansson 2y ago
I like the assumption that NYSE would just grab some EC2 instances and run an exchange on them, and that AMZN wouldn't bend several directions at once to deliver new products that just happen to exactly replicate the environment they're 'leaving'.
moomin 2y ago
The author of this article clearly knows a lot about the subject, but I think this would have been better titled "Low Latency Trading isn't Going To The Cloud and Here's Why". Or to put it a different way, infra peeps within exchanges have a very specialized skill set and priorities. General cloud infra peeps don't. No shade, but there's always going to be some business that doesn't make sense to switch to the standardized solution.
munk-a 2y ago
Low latency/rapid trading seems to have added no value to the stock market and eroded a large portion of the fair market evaluation of companies. Whether it's technically possible or not it's likely we'll need to artificially add delay into the system - ideally that can be done in a way that makes it fair to traders that have a naturally high latency connection to even the playing field.
- maerF0x0 2y ago
  The claim is they play marketmaker (they hold stocks for short periods of time so your trades execute faster), they obviously want a profit incentive for doing so.
  - kstrauser 2y ago
    That begs the question by assuming that trades executing faster are a good thing to optimize for. Is the stock market for investing in a company, or for extracting money from momentary fluctuations? Those seem to be mutually exclusive.
    - anamax 2y ago
      > Is the stock market for investing in a company With the exception of the IPO and buy-backs, the stock market is NOT for/about investing in the company. When you buy IBM on NYSE, IBM doesn't get anything. Similarly for selling stock. If IBM doesn't see any money from a trade, how is that trade an "investment" in IBM? Stock trading is trading partial ownership. That's very different from investing. In other news, there's no money in the stock market. The money that you pay for IBM stock does not go to the "stock market". It goes to whomever owned the stock that you bought.
sour-taste 2y ago
I used to work in machine maintenance, so I always think about what will happen when the machines involved fail. NYSE machines hosting the trading server fail: presumably they have hot backups they're ready to switch to but that takes time and will interrupt trading during the cut over. Not to mention that not all failures are hard failures, what if the NIC is downtrained to a lower speed, RAM is slower than it should be, or a single hard drive storing important data crashes? Lots of interesting failure modes. When the NYSE owns their own machines they can handle these cases directly. When they don't and Amazon is responsible for repairing these machines it might take a lot longer to get things fixed. I hope NYSE is thinking about hardware failures and building a system to check performance of their trading servers before letting them become the active host. Thinking about failures on the side of the traders: basically if they get unlucky then there could be delays as Amazon rerprovisions them replacement servers in the case of failures. This likely impacts what trading strategies are viable, and could cause them to lose money if machines fail at unlucky times.
- rcarmo 2y ago
  They literally have triple hardware redundancy. They can afford it.
Bluescreenbuddy 2y ago
I work at a prop firm/mm. You mention cloud and you'll be taken back behind the chemical shed.
mikewarot 2y ago
It's my opinion that stock exchanges should batch trades every 30 seconds, or longer (depending on the market), so that millisecond arbitrage becomes impossible. Front running the market in any manner should be illegal.
- seanhunter 2y ago
  Yes. There is actually some research into this idea where markets would effectively conduct rolling auctions, but I'm struggling to find it at the moment because I'm in a work meeting. Iirc the evidence suggests this would reduce market dislocations when news comes out etc so would generally improve price discovery. Markets already conduct an opening and closing auctions and conduct an auction to resume after a volatility break (what people often call a "circuit breaker" in the press although it's a volatility break) so this would not be as much of a technological lift to implement this as it may appear. How it works from a practical perspective is the exchange suspends matching for a period (so say 30mins) but order placement still works. Then when the market comes out of suspension a single print runs to uncross the order book, and everyone who submitted an order which matched gets executed at a single price. So as you say timing arbitrages of the current kind are effectively impossible. So in the case of a rolling auction you would do that print and then immediately suspend matching again and do another auction. Here's some background on how auctions work in financial markets in general but it's not the specific paper I was referring to https://www.princeton.edu/~jkastl/auctions_finance.pdf https://www.princeton.edu/~jkastl/auctions_finance.pdf
  - seanhunter 2y ago
    For example this is a proposal for continous auctions in power markets. https://www.deutsche-boerse.com/resource/blob/1458710/717470c265afd9428f43a60cd5e27791/data/7markets-m7-proposal-power-market-model_de.pdf https://www.deutsche-boerse.com/resource/blob/1458710/717470...
- pclmulqdq 2y ago
  10-100 millisecond auctions have been proposed seriously. 30 seconds is pretty long. If you would like a counter-argument, the options markets essentially trade on an auction basis: every time someone* sends an order that crosses a spread, there's an auction that does price discovery of the security. That does not promote having narrow spreads or transparent prices - options markets have huge spreads even for very liquid products. *someone who is not a market maker
julieharrison66 2y ago
[dead]

189 points by arcza 2y ago

Nothing to add but I found this to be a well written thought exercise on a space I realize I know very little technical detail of. Thanks for writing this!

arcza 2y ago
Thank you. I'm only happy to hear this was helpful. I'd also love comments from any HDL quants about how portable FPGA code would be to virtualized environments and what other languages might stand out particularly well for a VM stack.
- pclmulqdq 2y ago
  There are cloud FPGAs, but they are offered as a compute accelerators, and have no access to the network. Trading FPGAs need network access for latency.
  - KiranRao0 2y ago
    Im also sure that if theres enough customer demand (from people willing to spend $M), AWS will make network connected FPGA happen.
    - pclmulqdq 2y ago
      I'm sure they won't, at least without a lot of development. FPGA networking used for trading is borderline abusive of networking protocols, and I assume that Amazon doesn't want that on their production network.

h4kor 2y ago

I'm a total trading noob. Can you explain why a low latency is worth so much? And how these traders "exploit" that advantage to make a profit?

sgarland 2y ago
Reaction time to events, be it news, securities movements, etc. If you’re early, you can open positions before large movement has taken place; you can also close those positions precisely when you want. Sometimes this may be making pennies (x N shares), other times it may be quite substantial.
re-thc 2y ago
A delay could impact the price. Say you wanted it at $5.00 but it becomes $5.01 by the time your bid comes in you either miss out or pay more. These traders do it at high frequency. Imagine $0.01 x millions at a time.
smabie 2y ago
What would you do if you knew the price of something 1 day before everyone else? How would you make money off that?
lotsofpulp 2y ago
In any market, a seller or buyer willing to close the transaction quicker is a benefit for the opposing seller or buyer. Quicker can be on the scale of years to milliseconds, depending on what is being exchanged and amongst whom.
washedup 2y ago
This is extremely simplifying the nuance, but imagine there are two traders who want to buy what a single trader is willing to sell at a given price? Well, the first one to get to the exchange and "lift the offer" will get the price, while the second trader will have to pay a higher price.
ioblomov 2y ago
High-frequency trading is essentially a low-margin, high-volume play that exploits small price differences for profit. The most obvious example would be arbitraging the same security on different exchanges (buying low on one and selling pennies higher on another). Similarly, algorithmic models could exploit price volatility for individual securities on the same exchange. Under such conditions, fractions of a second can determine whether a given trade is a winning or losing one.

KiranRao0 2y ago

One key consideration is “provable fairness”. It’s my understanding that exchanges use techniques like long, same length fiber optic cables to all racks within the exchange datacenter to convince customers that everyone is on a fair playing field. This is a lot harder to do when a server is virtualized somewhere on some rack on EC2. Exactly as mentioned, people will try to optimize by spinning up/down instances as close to the exchange server as possible. Customers will be unhappy because they can’t prove that it’s fair, even if they have the closest server. Overall great, thought provoking writing btw

re-thc 2y ago
> This is a lot harder to do when a server is virtualized somewhere on some rack on EC2. There are bare metal EC2 instances.
- checker659 2y ago
  It's about the interconnect and the proximity.
  - blibble 2y ago
    and not having a for() loop doing multicast fanout in software which sounds like what AWS Transit Gateway is
- Shrezzing 2y ago
  At some point, someone has the shortest route connecting to the exchange's bare metal EC2 instance, and that organisation has a significant advantage in high frequency trading.
aynyc 2y ago
It's provable that it's not fair. AWS multicast is software based, not hardware based.
- vegardx 2y ago

nhourcard 2y ago

About the market data & monitoring element, beyond the usual suspects Clickhouse and kdb+ - worth noting that Aquis mentioned in this article uses QuestDB ( https://questdb.io/case-study/aquis/ https://questdb.io/case-study/aquis/)

pas 2y ago

... is there some movement toward "upload the strategy and let the exchange run it"? which would provide a more level playing field, reduce energy and hardware costs, etc?

dchftcs 2y ago
You mean enabling arbitrary code execution from a third party when you can lose billions of people's money in half a second? Also if two people want to make the same trade, who gets it? Exchanges do provide very limited special conditional execution instructions such as peg orders or stop orders, but it seems like a hard problem for them to support anything more sophisticated and general.
- infecto 2y ago
  I agree with your sentiment but I would clarify that historically some exchanges did indeed create custom order types for larger clients that were not always public knowledge. I think that has mostly been eliminated but there are still a range of unique order types you can utilize depending on the exchange.
- pas 2y ago
  It doesn't have to be arbitrary machine code. eBPF / WASM coupled with a standard library supplied by the exchange. (Plus the exchange can run it in a VM.) > Also if two people want to make the same trade, who gets it? Whoever pays more currently, right? So it can be uniform random and folks can pay for better than random chance, etc.
  - smabie 2y ago
    Or we could just.. not do that? It provides no benefit and a host of downsides
    - pas 2y ago
      It seems a lot more elegant/efficient/sane to me than trying to squeeze more and more racks into one building. So that's why I'm asking, as I think the benefits are clear, much better scalability, fairness (or getting as close to it as the exchange wants), cheaper (no need for fancy hardware), probably it would attract more market participants (lower barriers to entry). It's the same hypothetical "EC2 model" without the meta-game of trying to get closer to the cores the exchange runs at a given time. Can you elaborate on the downsides besides security?

jstsch 2y ago

Nice article. Wondering though why trading is not done in discrete batches, e.g. 5 second intervals? Trades in the same interval get filled equally or stochastically? Info about trades with that same 5 second batch delay? Is there some (theoretical) market efficiency thing at play? All this HFT feels wasteful and bad for 'regular' human investors.

snapcaster 2y ago
I guess the argument would be that this limits price discovery? I hear this proposed a lot and haven't heard super compelling arguments against it
- marcosdumay 2y ago
  The reason the GP is proposing it is because it limits price discovery. IMO, if you have a problem with limiting it to 5 seconds long quanta, you are doing something wrong.
Tesl 2y ago
This is how the Taiwan exchange used to do matching, and I still think it's the best system I've seen. I don't think the reason has anything to do with price discovery, it's just because exchanges want to maximise their trading fees. Continuous order book trading leads to more trades and hence more profit for the exchange.
- sparsely 2y ago
  They also charge differently (extortionately, some might say) for different speeds of data feed, although I'm not sure if they have tiers just for HFTs.
ramon156 2y ago
Shareholders would fume hearing this
sparsely 2y ago
The HFT is wasteful but isn't bad for human traders, they tend to get better prices. It's bad (sometimes) for huge investors (VHNW individuals, hedge funds, pension funds which I guess represent regular people) that want to make large trades without moving the market but there are also winners here - e.g. if Johnny the day trader buys a stock that Texas Teachers Fund is selling huge batches of, he's better off if HFTs are causing price changes to propagate more quickly.

yafetn 2y ago

Interesting read, thanks! Some points: > Hogging instances might pay, if this stops competitors getting good hosts. This would eat into PnL and is also wasteful on energy. Aren’t reserved instances cheaper than spot? > Bad players could do a ping test to many thousands of EC2 instances, find those which are also at very low latency to their good boxes (assuming these are competitors), and DDoS them during trading hours to hammer the hypervisor’s NIC. This would result in critical overhead occurring for competitors sending orders out. Leaving out the logistics of how someone could do this (why are your instances reachable from the internet?), wouldn’t you have a good case with your exchange to get them kicked out?

onionisafruit 2y ago
> wouldn’t you have a good case with your exchange to get them kicked out? Would you know who is doing the pinging? The cloud provider would know what account was pinging, but somebody doing this as a trading tactic would have the resources to churn through aws accounts as quickly as they are banned.

Samuel_w 2y ago

[flagged]

_benj 2y ago

This is an interesting read but I think it leaves outside what kind of trading is the one that would benefit from ULL. ULL and currently HFT seems to be very useful for market making (buying the ask and selling the bid and profiting from the bid-ask spread making parts of a cent per transaction, done a few million times a day), but there are other uses for HFT. One of them would be to execute very big orders over time to instead of drastically rising the price of the security they can get a better cost basis by performing a set of trades, letting the market absorb the impact and continuing with the order. The thought of having the market in a cloud provider like AWS scares me! Although I’m sure that AWS might have pitched the idea already. If the markets could be controlled by a private company that could schedule “maintenance” at convenient times for them, that sounds like a recipe for market manipulation bay trillion dollar company. Sounds like something the SEC wouldn’t stand for.

minimax 2y ago
Your description of market making is backwards. If you're buying the ask and selling the bid, you're paying the spread not collecting it.
- _benj 2y ago
  Thanks for the correction!

onionisafruit 2y ago

If a big exchange goes to the cloud it won’t look like a regular company setting up an aws account and getting a bunch of ec2 instances in us-east-1. They would at least have dedicated racks. I suspect the provider would end up with a plan where traders can get servers that all have the same network distance from the exchange’s nics (down to the same length of fiber).

SamuelAdams 2y ago
Honestly for something this niche I wonder if AWS would make a new region, like gov-cloud or secret. The goal would be to use tech that can accommodate ULL deployments.
- posnet 2y ago
  This seems to the most likely, and it's not unheard of, they have 'local regions' like osaka in Japan. Alternatively they could just stick a bunch of Outpost racks in the NYSE/NASDAQ data center and create an 'eXn.8xlarge' instance type and charge 100$ an hour.
kikimora 2y ago
I think and exchange would use AWS Outposts to get hardware in their data center.
gpderetta 2y ago
But at that point it would be just another colo, right?

minimax 2y ago

> The NYSE runs out of a public data centre (called NY4) which is run by Equinix. No. NY4 is in Secaucus. NYSE operates out of an ICE (NYSE parent co) owned facility in Mahwah about 25 miles north of there. They managed to pick out the one big US equities exchange operator _not_ running in an equinix facility. Sorry but this whole post sounds like someone who is sort of HFT adjacent but doesn't really know what they are talking about. Sending orders at "09:29:59.9999971 at the hope your order arrives at 100ns past 9.30am." What?

pclmulqdq 2y ago
> Sending orders at "09:29:59.9999971 at the hope your order arrives at 100ns past 9.30am." What? This literally does happen, though. One of the things the hyperscalers have convinced the world is that precise time is hard. Precise time is easy if you are willing to pay extra for your hardware. Sub-10-ns precision is unremarkable when you use PTP.
- minimax 2y ago
  It doesn't happen. All the exchanges have a "Day" order type that you can send before 9:30 that will be live on the book when it opens at 9:30 (or transitions to the "core" session at 9:30, most US exchanges have a premarket session prior to that). The idea of having some sophisticated strategy that sends 100ns before 9:30 is nonsense.
  - pclmulqdq 2y ago
    As far as I know, you're correct that this exact trade probably doesn't happen on the US exchanges - day orders do have a matching phase before market open, so it may be advantageous to slide in right afterward, but you likely wouldn't do it without knowledge of the state of the opening auction. However, sending things just a hair early for scheduled events to catch an exact time is a pretty well-known trick at this point. I remember complaining to the exchange that their clocks weren't precise enough for this to be reliable.

kwhitefoot 2y ago

Low latency trading should be forbidden. The exchanges should add random amounts of latency to every trade.

infecto 2y ago
Why? Historically spreads have been much wider, I for one appreciate how close they trade now. Instead of a guy on the floor taking dollars from you, you have a bot taking pennies. Even large funds like Vanguard have said that the current system has reduced costs in net.
- arcza 2y ago
  > Instead of a guy on the floor taking dollars from you, you have a bot taking pennies. ^ excellent way to put it
smabie 2y ago
They do it's called exchange jitter. And you still have HFT
- kwhitefoot 2y ago
  Add more jitter.

deleted 2y ago

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RyanHamilton 2y ago

There's no directly colocated hosting that I know of, but "direct connect" gets you close: https://www.equinix.co.uk/partners/aws https://www.equinix.co.uk/partners/aws

jwie 2y ago

Orders should have some durability and it would probably change behaviors enough to make hft go away. If you list a buy or sell order it just has to be in force for some period of time, say a minute or something. HFT shops will say this would reduce liquidity, but it would only make clear what real liquidity was in the first place.

tourist2d 2y ago
Why would anyone want that? Everyone would just quote a lot wider to make up for the potential volatility of the next minute, probably leading to worse trades for retail orders.
smabie 2y ago
If orders has to been good for atleast a minute it would massively increase the spread (by like over a 1000x probably) Also, what's wrong with hft?
rfoo 2y ago
Will you put an order 1 minutes before financial statements, then? If so, at what price? If no, knowing that there will be no liquidity in the very last minute before financial statements, will you put an order 2 minutes before? This won't propagate forever, but is going to bring very complicated changes.

TacticalCoder 2y ago

How would any cloud offering deal with something like, say, the full options data feed, which is close to 40 Gb/s of binary packed goodies? You need both a very fat pipe and ultra-low latency: does the cloud, any cloud, offer that? Also: how often have you guys seen the stock market being down? What's the "x nines" availability of, say, the US stock market and US options feed? Now: do we wanna talk about the various cloud outages that made the news? Sometimes lasting hours? Also what I've seen with the cloud is websites are now displaying spinners everywhere, for the myriad of not-low-latency-at-all microservices often taking seconds to respond. And that'd be on an ultra low latency fiber to the home setup, with 2 Gb/s down (and the ISP really supporting that). Why the heck do I have to wait seconds for oh-so-many things to display in my browser, on a last gen Ryzen ultra-speedy machine, with a super fat and low-latency Internet pipe? The worst offenders being all those banking websites showing a balance of 0 instead of "-" or "n/a" while fetching my info: nearly gives me heart attack every single time. I take it it has to do with micro-services all contacting shitloads of other micro-services, all living in the not-low-latency cloud. The problem being compounded by an army, a generation, of programmers who have never learned anything about optimization or latency and who solve every problem they have with the only hammer they have: the cloud. All these programmers know are JSON (or, worse, XML)... I mean: JSON vs 40 Gbit/s of interrupted bit-packed binary feeds? How could these two world ever reconcile? Now I don't do HFT but I do trade options and I do it through a desktop app and that app also offers an API through which I can fetch prices, send orders, etc. It's a good old Java app. And it's more advanced than any website I've ever used. Can we please not enshittify everything with countless micro-services and JSON files in the cloud?

__alexs 2y ago
Only someone that both misunderstands microservices and HFT architectures could have this opinion. 100 Gb/s is possible on AWS via Direct Connect.
smabie 2y ago
What does cloud have to do with micro services and json? Crypto exchanges already run on the cloud and it works.. mostly fine?
2y ago

JackMorgan 2y ago

IEX Exchange is building a cloud-first stock exchange that uses the concept of "slowed trading" to eliminate some of the worst practices of HFT. They even use a 38 mile loop of fiber to slow down connections that are "too close". https://en.m.wikipedia.org/wiki/IEX https://en.m.wikipedia.org/wiki/IEX

pclmulqdq 2y ago
I'm not sure IEX is cloud-first, that would be a recent development. Their 38 mile fiber gimmick is also kind of silly because they have to provide data to a consolidated feed with no delay.

netfortius 2y ago

See Morningstar's choice of being among the first customers of AWS Outpost.

aynyc 2y ago
Outpost is literally a AWS branded server rack that is installed into a data center, I don't think it's considered "cloud" in modern stack.
- netfortius 2y ago
  The end-to-end infrastructure (and parts of PaaS delivered within Outpost, from within the set of AWServices) is in fact a cloud "extension", with an on-prem leg, NOT an on-prem solution connected to the cloud. There are a lot of constructs which force the AWS cloud products/services usage, not the traditional on-prem ones.
  - aynyc 2y ago
    The outpost deployment in financial services that I've seen is the opposite in cloud extension. These companies want to say they are cloud-enabled, rather than push a full stack onto the AWS regions, they essentially buy AWS outpost rack as a way to extend their on-prem environment to the cloud (mainly S3).

allenrb 2y ago

Fun thought exercise, thanks! My question is, what advantage would a large exchange find in moving to cloud? They’ve already got the personnel capable of managing their environment. They’re not a rapidly-growing startup in need of flexibility. They’re large enough to get at least decent deals purchasing gear. “The cloud” will naturally expect to make a profit on the deal, which likely eats up (and then some) any savings which might otherwise be delivered. I “get” cloud in a lot of circumstances but it doesn’t seem to make much sense here.

SJC_Hacker 2y ago
Without reductions in personnel, then none. That's essentially what you're buying from a cloud provider. Most of the time its not so much renting the hardware as renting their labor in maintenance. That is assuming your hardware needs don't have a wide enough variance from time to time (scale up/scale down)

posnet 2y ago

The biggest current limitation with cloud providers when it comes to exchange tech is the lack of real multicast support. It is rare outside of exchanges, but extremely low latency L1 multicast market data has become the backbone of exchanges, both for fairness and for scalability. Knowing you can saturate your entire network with 10G traffic and every participant will get the same market data packets at the same time[0], and there will be zero queuing or bottlenecks is very hard to do otherwise. There is a pretty good podcast episode about it out of Jane Street[1]. I know AWS have 'multicast support' but last time I tested it, it was clearly just uni-cast traffic with a software switch doing fan-out/copying, I assume using the same tech as their transit gateway, I think it was called hyperplane or something. [0]: for some definition of the same time, at least low enough that you can't measure it without equidistant optical splitters or White Rabbit synced devices. [1]: https://signalsandthreads.com/multicast-and-the-markets/ https://signalsandthreads.com/multicast-and-the-markets/

secondcoming 2y ago
> lack of real multicast support Yup, this is a problem for us in GCP today even outside of trading. I don't know how Pub/Sub works for them.
- pclmulqdq 2y ago
  Pub/sub systems in unicast-only environments are very complex distributed systems to handle the load involved in fan-out routing while maintaining a global order. I had an interviewer once get annoyed with me for suggesting using multicast to solve the fan-out part of a pub/sub system, which made the global ordering part small and simple. We lost a lot by thinking of HTTP as the one true level of network abstraction.
  - amluto 2y ago
    A reliable multicast network that preserves global order even during maintenance and doesn’t drop packets is not something you will find off the shelf. A reliable multi-tenant multicast network also appears to be a rare beast. I’ve only heard of it in finance, and that’s only because it’s private and expensive and all the participants need to be generally nice to each other because it’s a repeated game and the operator can literally pull the plug if the rules are broken.

dusted 2y ago

Showing that I don't understand economics while also telling that I don't understand economics: It would probably do the world more good to tweak the structures making ULL trading profitable anyway, it's not like the trading in and of itself brings any value to the broader world, while consuming enormous amounts of resources that could have been spent on actually improving systems that create real value.

cosmic_quanta 2y ago
> it's not like the trading in and of itself brings any value to the broader world This is a common sentiment, but the reality is that increasing market participation is good for everyone. Yes, even retirement funds benefit from the presence of market-makers. Liquid markets allow for better price discovery and cheaper transaction costs.
- dusted 2y ago
  I specifically the high-speed trading. I definitely agree that actual investment and trading has some benefit. Nobody was helped by the 200 nanosecond thing that the machines did when the marked opened (except the owners of said machines, of course)
  - johngladtj 2y ago
    Plenty you people were, you just don't notice it.
  - andruby 2y ago
    What if collectively those ULL and HFT orders help stabilise the market. Then I would say, yes, "we, the world" are being helped.
hackerlight 2y ago
Riddle me this. If you got what you wanted, and these value destroying people went away, what would they be replaced with?

sesuximo 2y ago

If an exchange goes to AWS, would it suddenly look worse than its competitors? And would that hurt the exchange’s revenue?

hoseja 2y ago

Cloud of rapidly expanding ionized gasses, yeah.

eschneider 2y ago

Why on earth would exchanges go full cloud when running the trading infrastructure reliably and predictably is their whole reason for existing?

mcconaughey 2y ago

At first glance, it seems this would even the playing field. However, large players will allocate resources to spinning up instances and overloading machines. Similar to how we're seeing the DDOS shenanigans going on in crypto. Net-net, it still benefits startup quant shops and sophisticated independents. Most retail isn't doing HFT or really any quant. But for people wanting to have their own shops, this is a better version than having to build hardware and colo.

hn8305823 2y ago

It's amazing to me that regulators have not required a minimum latency, or random latency dispersion in orders/trades to level the playing field.

gpderetta 2y ago
Should they also require a F1-like cap on FLOPS for offline model fittings? A limit on bandwidth? What about quant compensation?

kjkjadksj 2y ago

Lets start with exchanges allowing for trades during roman catholic holidays

SkipperCat 2y ago

Why would the exchanges want to move their colos into the cloud. They've spent the capex and they can charge lots of money to rent data center space, cross connects and other services to their customers. If they moved to the cloud, all that revenue would go from them to AWS/GCP/etc. Doesn't seem like a profitable move for the exchanges. They make more $$$ with on prem setups.

lulznews 2y ago
Somebody needs a project to get promoted …

kristjansson 2y ago

I like the assumption that NYSE would just grab some EC2 instances and run an exchange on them, and that AMZN wouldn't bend several directions at once to deliver new products that just happen to exactly replicate the environment they're 'leaving'.

moomin 2y ago

The author of this article clearly knows a lot about the subject, but I think this would have been better titled "Low Latency Trading isn't Going To The Cloud and Here's Why". Or to put it a different way, infra peeps within exchanges have a very specialized skill set and priorities. General cloud infra peeps don't. No shade, but there's always going to be some business that doesn't make sense to switch to the standardized solution.

munk-a 2y ago

Low latency/rapid trading seems to have added no value to the stock market and eroded a large portion of the fair market evaluation of companies. Whether it's technically possible or not it's likely we'll need to artificially add delay into the system - ideally that can be done in a way that makes it fair to traders that have a naturally high latency connection to even the playing field.

maerF0x0 2y ago
The claim is they play marketmaker (they hold stocks for short periods of time so your trades execute faster), they obviously want a profit incentive for doing so.
- kstrauser 2y ago
  That begs the question by assuming that trades executing faster are a good thing to optimize for. Is the stock market for investing in a company, or for extracting money from momentary fluctuations? Those seem to be mutually exclusive.
  - anamax 2y ago
    > Is the stock market for investing in a company With the exception of the IPO and buy-backs, the stock market is NOT for/about investing in the company. When you buy IBM on NYSE, IBM doesn't get anything. Similarly for selling stock. If IBM doesn't see any money from a trade, how is that trade an "investment" in IBM? Stock trading is trading partial ownership. That's very different from investing. In other news, there's no money in the stock market. The money that you pay for IBM stock does not go to the "stock market". It goes to whomever owned the stock that you bought.

sour-taste 2y ago

I used to work in machine maintenance, so I always think about what will happen when the machines involved fail. NYSE machines hosting the trading server fail: presumably they have hot backups they're ready to switch to but that takes time and will interrupt trading during the cut over. Not to mention that not all failures are hard failures, what if the NIC is downtrained to a lower speed, RAM is slower than it should be, or a single hard drive storing important data crashes? Lots of interesting failure modes. When the NYSE owns their own machines they can handle these cases directly. When they don't and Amazon is responsible for repairing these machines it might take a lot longer to get things fixed. I hope NYSE is thinking about hardware failures and building a system to check performance of their trading servers before letting them become the active host. Thinking about failures on the side of the traders: basically if they get unlucky then there could be delays as Amazon rerprovisions them replacement servers in the case of failures. This likely impacts what trading strategies are viable, and could cause them to lose money if machines fail at unlucky times.

rcarmo 2y ago
They literally have triple hardware redundancy. They can afford it.

Bluescreenbuddy 2y ago

I work at a prop firm/mm. You mention cloud and you'll be taken back behind the chemical shed.

mikewarot 2y ago

It's my opinion that stock exchanges should batch trades every 30 seconds, or longer (depending on the market), so that millisecond arbitrage becomes impossible. Front running the market in any manner should be illegal.

seanhunter 2y ago
Yes. There is actually some research into this idea where markets would effectively conduct rolling auctions, but I'm struggling to find it at the moment because I'm in a work meeting. Iirc the evidence suggests this would reduce market dislocations when news comes out etc so would generally improve price discovery. Markets already conduct an opening and closing auctions and conduct an auction to resume after a volatility break (what people often call a "circuit breaker" in the press although it's a volatility break) so this would not be as much of a technological lift to implement this as it may appear. How it works from a practical perspective is the exchange suspends matching for a period (so say 30mins) but order placement still works. Then when the market comes out of suspension a single print runs to uncross the order book, and everyone who submitted an order which matched gets executed at a single price. So as you say timing arbitrages of the current kind are effectively impossible. So in the case of a rolling auction you would do that print and then immediately suspend matching again and do another auction. Here's some background on how auctions work in financial markets in general but it's not the specific paper I was referring to https://www.princeton.edu/~jkastl/auctions_finance.pdf https://www.princeton.edu/~jkastl/auctions_finance.pdf
- seanhunter 2y ago
  For example this is a proposal for continous auctions in power markets. https://www.deutsche-boerse.com/resource/blob/1458710/717470c265afd9428f43a60cd5e27791/data/7markets-m7-proposal-power-market-model_de.pdf https://www.deutsche-boerse.com/resource/blob/1458710/717470...
pclmulqdq 2y ago
10-100 millisecond auctions have been proposed seriously. 30 seconds is pretty long. If you would like a counter-argument, the options markets essentially trade on an auction basis: every time someone* sends an order that crosses a spread, there's an auction that does price discovery of the security. That does not promote having narrow spreads or transparent prices - options markets have huge spreads even for very liquid products. *someone who is not a market maker

julieharrison66 2y ago

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