3 ms·

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

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 3y 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 3y 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 3y 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
EMH123 3y ago
That works in theory but as soon as you have multiple stocks batch auctions become worse than continuous. How are you can you implement a long/short strategy with auctions? If prices are transparent during the auctions then the stocks that runs the latest auction becomes susceptible to latency arbitrage so you're back to square one. If prices are not transparent you can't see prices during the auctions and you can't be sure of the relative prices for your long and short leg which complicates risk management considerably

seanhunter 3y 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 3y 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 3y 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

EMH123 3y ago

That works in theory but as soon as you have multiple stocks batch auctions become worse than continuous. How are you can you implement a long/short strategy with auctions? If prices are transparent during the auctions then the stocks that runs the latest auction becomes susceptible to latency arbitrage so you're back to square one. If prices are not transparent you can't see prices during the auctions and you can't be sure of the relative prices for your long and short leg which complicates risk management considerably