6 ms·

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 stochasti

by 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.
IshKebab 2y ago
If you think about it you can never eliminate the advantage of being faster. If you do 5 seconds batches it just means the edges of the batches become the time-sensitive points. If you want to kill HFT you can do it directly via very very small transaction fees. But guess how popular that is...
- chardz 2y ago
  You can certainly alleviate the disadvantage of being slower though - and that’s exactly what literature in batch trading argues.
- bloak 2y ago
  > If you think about it you can never eliminate the advantage of being faster. If you do 5 seconds batches it just means the edges of the batches become the time-sensitive points. You mean you can never completely eliminate the advantage? But mostly eliminating it might still be useful? Suppose the rule is that if you get your request in by 01:23:45 then it gets handled in the following 5-second period and the response is sent out at 01:23:50. Does someone (A) who finalises their request at 01:23:44.9999 and gets the result back at 01:23:50.0001 have an advantage over someone else (B) who has to finalise their request by 01:23:44.8 and gets their result back at 01:23:50.2? Yes, certainly, but it doesn't seem to be much of an advantage ... So person A can take account of exciting news that arrives at 01:23:44.9, while person B can't, true, but when it comes to reacting to other trades, person A has 4.9998 seconds to think about the news, while person B has 4.6 seconds to think about it, which doesn't seem like a huge difference. Compared to how things work today.
- xrd 2y ago
  It's funny that you say that, with the crypto transaction fees still a big problem. Feels like HFT and crypto are on a convergence towards that concern.
- deleted 2y ago
  [deleted]
- gpderetta 2y ago
  Exchanges already extract per order commissions. You do not pay per message (so add, cancels and amends are free, you only pay when you get traded [1]). A per-message would probably significantly affect existing strategies and greatly increase spreads, but I don't think it would prevent all forms of ULL trading. [1] But even there exchanges offer rebates, if not outright incentives, for market makers to provide liquidity.
misja111 2y ago
> All this HFT feels wasteful and bad for 'regular' human investors. Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc. I used to be a market maker in the 90's before HFT took off. The margins we kept sometimes felt like a rip off but customers had no other choice but to accept them. People who ask for transaction fees, forced delays in executing or whatever, tend to forget that these force market makers to increase their spreads, which means customers eventually pay the price.
- Shrezzing 2y ago
  >Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc. It's not automatically the case that the disappeared margins & thinning of bid/asks have been shared equitably between the trading firms and customers. Take two exaggerated markets for example: 1) No HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. A market maker charges the customer $5 to access the 100 shares at $1 each. The customer pays $105. The market maker earns $5. 2) With HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. The customer clicks "buy" on their trading platform, the HFT races to the $100 shares, and purchases them, then fulfills the order at $105. The customer pays $105. The HFT firm earns $5. For the end-customer, all that's happened is the margin goes to another firm. The consumer still has no other choice but to accept these transaction fees. There was arguably a need for HFTs to reduce the market-makers exorbitant fees in the 2000's, but that requirement has been served, and the technology now exists to remove both from the market entirely. HFTs are a rent-seeking entity interjecting in a market which, at least in theory, exists to most efficiently allocate capital to the productive benefit of all.
  - mtoner23 2y ago
    This is entirely false and ignores Reg NMS. Everyone must execute at the NBBO. As well customer orders are often given better and tighter prices than other market participants. HFT firms will often offer them better than NBBO prices. As well, none of these prices you quote would not exist without market makers, its just now the fact that to be a market maker you must be an HFT firm as well due to the scale that is now required.
kasey_junk 2y ago
How do you tie break? If there are more sellers than buyers (or vice versa) at the clearing price?
- crote 2y ago
  Flip a coin.
- xnorswap 2y ago
  The same way you would without a clock I guess? You could match what you can distributed equally and leave the rest unsettled. You could let people decide whether to roll-over the partial bid into a new bid on the next clock or to cancel unsettled. You could clock to something both very fast on a human scale (50ms), quick enough it'd still feel instant but slow enough that it could reduce HFT silliness and need for extreme low latencies.
  - WiSaGaN 2y ago
    > You could match what you can distributed equally and leave the rest unsettled. Equally per market participant? Do large participant like banks trade same amount as retail investor one trade at a time? Per quantity? HFT will time the end of the interval and decide to place a large order or not.
    - xnorswap 2y ago
      It would be weighted by bid size. If there's $10m of bids one side and $5m of offers on the other, you match up the $5m on that side and every bid gets 50% settled. I'm not sure I understand the problem with "waiting" for the end of the clock. The pool wouldn't be public so you couldn't get knowledge inspecting the pool. All bids and offers would be published on the clock and settled by weighing all the bids and offers against each other and matching by volume. The trickier issue is what happens in this scenario (assuming limit orders): Person A bids for 500 units @62 Person B offers 100 units @61 Person C offers 400 units @60 Clearly there needs to be full settlement, we have a bidder who wants to buy 500 units at a price which sellers are happy to sell at. Correct me if I'm wrong, but in a traditional market it would depend on the order they came in. Here we would need a formula to work out the correct settlement price. Intuitively this ought to be somewhere just above 61. ( If it were just two people, a bid at 62 and an offer at 60, you could intuit a fair settlement would be 61. ) I'm sure fair formulae can be derived however.
cosmic_quanta 2y ago
This is how wholesale electricity is traded, although for unrelated technical reasons. Bids and offers are collected for auctions that happen at regular known intervals, for example every 15min.
- BOOSTERHIDROGEN 2y ago
  Any article that talk this in depth?
  - cosmic_quanta 2y ago
    I'm afraid I do not know, but the Wikipedia page is pretty good: https://en.wikipedia.org/wiki/Electricity_market https://en.wikipedia.org/wiki/Electricity_market
senkora 2y ago
Those batched trades are called “auctions” and they are a part of many exchanges. I think it’s pretty uncommon to do them every N seconds. A common pattern is to collect quotes before the market open, do an “opening auction” to set the opening price, and then switch to continuous trading for the rest of the day. If trading in a stock ever pauses (which can happen for a variety of reasons) then another auction occurs when trading is restarted.
blitzar 2y ago
> All these people in tech optimising clicks, ads and engagment feels wasteful and bad for 'regular' humans.
jeffreyrogers 2y ago
IIRC they have done trials of this on some exchanges. It didn't make a big difference either way. The opening and closing auctions are already sort of done the way you describe.

by jstsch 2y ago

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.

IshKebab 2y ago

If you think about it you can never eliminate the advantage of being faster. If you do 5 seconds batches it just means the edges of the batches become the time-sensitive points. If you want to kill HFT you can do it directly via very very small transaction fees. But guess how popular that is...

chardz 2y ago
You can certainly alleviate the disadvantage of being slower though - and that’s exactly what literature in batch trading argues.
bloak 2y ago
> If you think about it you can never eliminate the advantage of being faster. If you do 5 seconds batches it just means the edges of the batches become the time-sensitive points. You mean you can never completely eliminate the advantage? But mostly eliminating it might still be useful? Suppose the rule is that if you get your request in by 01:23:45 then it gets handled in the following 5-second period and the response is sent out at 01:23:50. Does someone (A) who finalises their request at 01:23:44.9999 and gets the result back at 01:23:50.0001 have an advantage over someone else (B) who has to finalise their request by 01:23:44.8 and gets their result back at 01:23:50.2? Yes, certainly, but it doesn't seem to be much of an advantage ... So person A can take account of exciting news that arrives at 01:23:44.9, while person B can't, true, but when it comes to reacting to other trades, person A has 4.9998 seconds to think about the news, while person B has 4.6 seconds to think about it, which doesn't seem like a huge difference. Compared to how things work today.
xrd 2y ago
It's funny that you say that, with the crypto transaction fees still a big problem. Feels like HFT and crypto are on a convergence towards that concern.
deleted 2y ago
[deleted]
gpderetta 2y ago
Exchanges already extract per order commissions. You do not pay per message (so add, cancels and amends are free, you only pay when you get traded [1]). A per-message would probably significantly affect existing strategies and greatly increase spreads, but I don't think it would prevent all forms of ULL trading. [1] But even there exchanges offer rebates, if not outright incentives, for market makers to provide liquidity.

misja111 2y ago

> All this HFT feels wasteful and bad for 'regular' human investors. Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc. I used to be a market maker in the 90's before HFT took off. The margins we kept sometimes felt like a rip off but customers had no other choice but to accept them. People who ask for transaction fees, forced delays in executing or whatever, tend to forget that these force market makers to increase their spreads, which means customers eventually pay the price.

Shrezzing 2y ago
>Quite the opposite, thanks to the tough competition the market makers are setting the bid/asks spreads as minimal as possible. Which leads to less costs for human investors, pension funds, insurance companies etc. It's not automatically the case that the disappeared margins & thinning of bid/asks have been shared equitably between the trading firms and customers. Take two exaggerated markets for example: 1) No HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. A market maker charges the customer $5 to access the 100 shares at $1 each. The customer pays $105. The market maker earns $5. 2) With HFTs: The customer wants 100 shares in Company A. The shares are available on two exchanges, one at $100, and another at $105. The customer clicks "buy" on their trading platform, the HFT races to the $100 shares, and purchases them, then fulfills the order at $105. The customer pays $105. The HFT firm earns $5. For the end-customer, all that's happened is the margin goes to another firm. The consumer still has no other choice but to accept these transaction fees. There was arguably a need for HFTs to reduce the market-makers exorbitant fees in the 2000's, but that requirement has been served, and the technology now exists to remove both from the market entirely. HFTs are a rent-seeking entity interjecting in a market which, at least in theory, exists to most efficiently allocate capital to the productive benefit of all.
- mtoner23 2y ago
  This is entirely false and ignores Reg NMS. Everyone must execute at the NBBO. As well customer orders are often given better and tighter prices than other market participants. HFT firms will often offer them better than NBBO prices. As well, none of these prices you quote would not exist without market makers, its just now the fact that to be a market maker you must be an HFT firm as well due to the scale that is now required.

kasey_junk 2y ago

How do you tie break? If there are more sellers than buyers (or vice versa) at the clearing price?

crote 2y ago
Flip a coin.
xnorswap 2y ago
The same way you would without a clock I guess? You could match what you can distributed equally and leave the rest unsettled. You could let people decide whether to roll-over the partial bid into a new bid on the next clock or to cancel unsettled. You could clock to something both very fast on a human scale (50ms), quick enough it'd still feel instant but slow enough that it could reduce HFT silliness and need for extreme low latencies.
- WiSaGaN 2y ago
  > You could match what you can distributed equally and leave the rest unsettled. Equally per market participant? Do large participant like banks trade same amount as retail investor one trade at a time? Per quantity? HFT will time the end of the interval and decide to place a large order or not.
  - xnorswap 2y ago
    It would be weighted by bid size. If there's $10m of bids one side and $5m of offers on the other, you match up the $5m on that side and every bid gets 50% settled. I'm not sure I understand the problem with "waiting" for the end of the clock. The pool wouldn't be public so you couldn't get knowledge inspecting the pool. All bids and offers would be published on the clock and settled by weighing all the bids and offers against each other and matching by volume. The trickier issue is what happens in this scenario (assuming limit orders): Person A bids for 500 units @62 Person B offers 100 units @61 Person C offers 400 units @60 Clearly there needs to be full settlement, we have a bidder who wants to buy 500 units at a price which sellers are happy to sell at. Correct me if I'm wrong, but in a traditional market it would depend on the order they came in. Here we would need a formula to work out the correct settlement price. Intuitively this ought to be somewhere just above 61. ( If it were just two people, a bid at 62 and an offer at 60, you could intuit a fair settlement would be 61. ) I'm sure fair formulae can be derived however.

cosmic_quanta 2y ago

This is how wholesale electricity is traded, although for unrelated technical reasons. Bids and offers are collected for auctions that happen at regular known intervals, for example every 15min.

BOOSTERHIDROGEN 2y ago
Any article that talk this in depth?
- cosmic_quanta 2y ago
  I'm afraid I do not know, but the Wikipedia page is pretty good: https://en.wikipedia.org/wiki/Electricity_market https://en.wikipedia.org/wiki/Electricity_market

senkora 2y ago

Those batched trades are called “auctions” and they are a part of many exchanges. I think it’s pretty uncommon to do them every N seconds. A common pattern is to collect quotes before the market open, do an “opening auction” to set the opening price, and then switch to continuous trading for the rest of the day. If trading in a stock ever pauses (which can happen for a variety of reasons) then another auction occurs when trading is restarted.

blitzar 2y ago

> All these people in tech optimising clicks, ads and engagment feels wasteful and bad for 'regular' humans.

jeffreyrogers 2y ago

IIRC they have done trials of this on some exchanges. It didn't make a big difference either way. The opening and closing auctions are already sort of done the way you describe.