8 ms·

> I would assume TXSE would want quick access to that order flow Perhaps Texas could use a different trading model that doesn't require ultra high speed tradin

> I would assume TXSE would want quick access to that order flow Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. Matt Levine often mulls the idea of a system with a trading window that doesn't let the fastest connection to the order book win. Perhaps an order book that works at human speeds so humans can trade too (I can think of a few ways to do it - but would need modelling to try and figure what actually works). He points out that most trades are done in the last hour, so really trading only needs to occur once a day. The issue is whether a market trading system can be designed with suitable restrictions that beats the current market design (for listed companies and for traders). Designing markets is hard because you have to assume every player is selfish and only cooperates where it is to their benefit and will defect or cheat if the incentives of the market encourage that (Enron in the California energy markets). Unlikely since SEC would need to approve of a different system of market trade incentives. Edit: Personally I would like to see an exchange that was more international. I'm from New Zealand and our good businesses often list on the Australian exchange rather than the NZSX. The system of ADRs for other countries feels like a massive hack.

robertlagrant 1y ago
> He points out that most trades are done in the last hour, so really trading only needs to occur once a day. Presumably then the last trader has the most information, and so the game would be getting the info as late as possible and trading as late as possible, but not too late.
- schlauerfox 1y ago
  That's one thing that will make blockchain trading interesting as it's discreet block by block, such as the ex-dividend date who holds a stock when the dividends are paid, might make fees for that block very competitive. The SEC is really struggling now with good regulation but it's coming end of the year to draw the line in the sand.
  - stuartjohnson12 1y ago
    I was going to make the old joke about discrete vs discreet but I suppose that blockchain trading is both.
    - jdonaldson 1y ago
      throw in discreate as well :)
phinnaeus 1y ago
And Australian companies often list in the US.
kasey_junk 1y ago
IEX tried this to much fanfare. Turns out most participants don’t particularly care about that as a motivating factor.
- peterbonney 1y ago
  I'd say IEX has done remarkably well - it's not likely to displace NASDAQ or NYSE but it has solidified its place as the #3 US exchange by any reasonable measure. If TXSE achieves comparable market share I'd call that a wild success. You're not wrong to say that most participants don't care about what IEX offers, but enough do to make a meaningful dent in trading volume.
  - kasey_junk 1y ago
    It’s definitely not 3rd place. That’s cboe and it’s not close. It’s hanging around with ~2% of the trade volume. https://www.cboe.com/us/equities/market_statistics/ https://www.cboe.com/us/equities/market_statistics/ I don’t know if that is “remarkably well” but it certainly isn’t some market paradigm shift. If you were to tell me in 10 years the Texas exchange would have 2% of the market I’d believe you. But I’d still not be terribly impressed.
    - pclmulqdq 1y ago
      IEX is "3rd place" in their mind only because the other 12 exchanges are owned by two companies. IEX is 13/13 for volume, and the main reason they have any volume is because IEX sometimes has the NBBO so you have to trade there per reg NMS.
    - peterbonney 1y ago
      You're right, my view is way out of date. I didn't realize CBOE had grown so much in straight equities trading. IEX is the best of the rest, but it's NYSE, NASDAQ and (to my surprise) CBOE as the clear top 3.
  - mtoner23 1y ago
    Cboe miax and memx are all doing better than IEX
twothreeone 1y ago
"Most trades" doesn't necessarily mean "most profitable trades" ;)
AaronM 1y ago
If trades were batch processed say every 5 seconds, and randomized in the case of ties would that solve the fastest connection issue?
- throwawaymaths 1y ago
  IIUC being fast is not as much of a problem as dropping in a bid and cancelling it at the last moment
- valkmit 1y ago
  Also it just changes the nature of the game. There's no incentive to interact with the batch until the absolute last microsecond. It will still be dominated by latency-sensitive participants, just in a manner where the difference between visible liquidity and latent liquidity is even more diverged from reality (on average).
pants2 1y ago
One interesting approach to this is the gas auction system in DeFi where (on Ethereum) traders bid to have their trades included first in a block, and that additional payment is burned / accretive to ETH holders. Though that turns "fastest connection" into "highest bidder" advantage. Another approach that Aztec and some others are taking is to shield all transactions with zkSNARKs such that the intent of a transaction isn't known until it's completed. Combined with deterministic block times you could force random ordering of transactions in batches, effectively mitigating the fastest connection OR highest bidder advantage.
- idiotsecant 1y ago
  The real question is whether we even need stock exchange organizations if we can do it all on chain without them. I think the only thing you really need is someone to handle the stock ownership credentials in the event that legal action require involuntary transfers, that sort of thing. That could be a much smaller footprint organization, I think.
  - pants2 1y ago
    That's the promise of tokenized securities! Securitize + BlackRock are trying to make that happen. This should remove a lot of middlemen to the trading and settlement process.
mhh__ 1y ago
I suppose you could but the problem is that the liquidity would be either shit or more charitably very different to other exchanges that already do what they're supposed to do.
throwawaymaths 1y ago
Just make all positions irrevocable for at least 10 seconds after posting.
- JumpCrisscross 1y ago
  > Just make all positions irrevocable for at least 10 seconds after posting Sounds great for Wall Street. Spreads would necessarily widen as people buffer out. Meanwhile, you’ve turned every lit order into a 10-second option for market participants. Which means there is still a latency advantage to lifting or hitting a standing order first.
  - throwawaymaths 1y ago
    only if you make those bids visible. the bids are held in a buffer and at the end of the buffer, it either completes a trade or appears on the order book. iirc some market tried to do this with a literal loop with a physical latency.
    - JumpCrisscross 1y ago
      > only if you make those bids visible. the bids are held in a buffer and at the end of the buffer Everyone else's bids are invisible. The ones you submit--for your self and for your customers--are not. The larger a brokerage operation you run, the more of an edge you get under this system. We created the unified tape and passed Rule NMS specifically to remove these incentives.
softwreoutthere 1y ago
why would they do that? the system is designed to reward asymmetry.
usefulcat 1y ago
> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. What would that look like? Periodic auctions? Certainly it could be done, I'm just trying to understand what problem might be solved, and whether the solution would be effective. For example, even with the opening and closing auctions we have today, there can be an advantage to getting your order accepted right before the deadline. Some participants do this, most don't really (depending on the exact definition of "right before"). But the fact that some do tells me that some participants would do the same thing with periodic auctions, and at least for them latency would still be important. If, as seems likely, latency is fundamentally important to at least some styles of trading, how do you incentivize participants to not value it?
- jen20 1y ago
  One option is to add a random delay to every trade, thus making high speed arbitrage substantially more difficult.
  - ukd1 1y ago
    Another is to reset the clock on the auction each change
  - drob518 1y ago
    I suspect that randomness of some sort is the only way. Without that, whatever the rules of the game, there is a way to somehow get a slim advantage. You can make the advantage small and the costs to try to gain it large, such that it isn’t cost effective to try, but as we’ve seen with HFT, it’s amazing how much people will spend to pick up pennies. Even a tiny gain, exploited frequently enough can be quite profitable.
  - graycat 1y ago
    > random delay A Poison process. Just specify the expected value. E.g., if the expected value is 5 seconds and have gone some hours without an event, then the expected time is still 5 seconds. E.g., like the time to some radio active delay and whatever its expected value to decay is.
resters 1y ago
Reg NMS’s Order Protection Rule (Rule 611) says you can’t trade through protected NBBO quotes, outside a few narrow exceptions. That’s the letter of the law. The practical effect isn’t just a bit of latency. It rewires incentives. With 611 in place, the question for latency-sensitive firms becomes: what HFT tactics can I run that are 611-compatible? Without 611, the question would be: what HFT tactics actually add value for my counterparties? That’s a very different optimization. For firms on direct feeds (often building their own synthetic NBBO), 611 doesn’t add much information. The constraint is compliance, not discovery. Because NBBO is size-agnostic and top-of-book, anchoring execution to it lets micro-lot quotes steer outcomes. You can influence the protected price with tiny displayed size. That’s great for gamesmanship, bad for displayed depth, size-sensitive pricing, and near-touch discovery. Also: if two informed counterparties want to trade away from the protected price to reflect size or information, 611 mostly blocks that outside limited carve-outs. We lose mutually beneficial, size-aware prints to satisfy a benchmark that ignores size. On settlement, the uniform benchmark helps in calm markets. But it’s naïve to think that holds through a real black swan. In stress, timestamp ambiguities and fragmented data make “what was executable” contestable, and disputes spike regardless of quote protection. In a sound market structure, the clearer (CCP or clearing broker) should carry and underwrite that tail risk—margin, default funds, capital, and enforceable rulebooks. Instead, 611 shifts accountability onto quote-protection mechanics, insulating clearers from responsibility and, perversely, amplifying systemic risk when the system most needs well-capitalized risk absorbers.
- UltraSane 1y ago
  There is no reason why shares should be bought on sold in time frames far too short for anything to have meaningfully changed about the companies or market conditions.
  - bawolff 1y ago
    The fact that people make money off of HFT by definition means that the market conditions have changed in those time frames.
    - 1y ago
quickthrowman 1y ago
Why would you create arbitrage opportunities for no reason? That’s the only thing that would happen I can see from an exchange that can’t keep up with the NBBO price, which you are obligated by law to quote regardless. People in the finance industry will arb between digital and human markets and net a profit from it. It seems pointless to me, but perhaps I’m not fully grasping what that would do.
snowwrestler 1y ago
Bit of an aside, but I really do not understand the concerns with trading speed. I can trade at human speed now: when I want to make a trade, I put in the order and it gets executed. Speed elsewhere in the market makes it easier, not harder, for me to trade when I want to. And I don’t care who my counterparty is; that’s a fundamental feature of a stock exchange. If A is always faster than B because A is 2 racks closer to my broker in the data center… so what? How does that hurt me? Good for A. A computer-powered trading strategy can react faster than me to news—true. But that’s fine because I don’t have to follow a breaking-news investing strategy. There are tons of others, many of which have proven to work very well.
- Fade_Dance 1y ago
  >How does that hurt me? Because lit orders get front run. Every sophisticated participant/algo is exceptionally efficient at extracting money from less sophisticated participants. As someone who trades decent volume but doesn't have a fully institutional grade workflow, I have the fortune of dealing with this... Simple lit orders (posting an order directly to an exchange) will be taking advantage of by both market makers, by HFTs, and by smarter execution algorithms. The algorithms running the bids and asks will widen spreads. Sell orders will peg to one cent below your ask, and if flows start to reverse, they will pull their liquidity and the slower participants get their liquidity swept through (adverse selection). The next step up is to use something like a midpoint algorithm or hidden order, but hidden orders will be pinged with one share from the robots and you will get sniffed out and positioned against. If they detect size in a midpoint algorithm, the liquidity in the opposite direction will evaporate, and they will "walk" the dumb midpoint algorithm down, take the liquidity, and then reset the mid back to where it was. The list goes on. It's generally an awful environment for "regular" participants. Moving on from simple improvements available to the more advanced retail space like midpoint algorithms and VWAP algorithms, you have algo routes that are explicitly designed to take advantage of the "lesser" order types. If they are in a position to get a fair fill, they will rest the order in case they see a situation they can take advantage of, and only take mid fill if the outlook deteriorates (this is all millisecond time frame stuff, but the orders will be worked in an automated fashion throughout the day - time frame is configurable). On the more developed institutional side, liquidity is sourced in dark venues designed to ward off HFTs and front-running, or sourced in fair flash-auctions which are again designed to ward off hfts and information leakage from the auction spawner. So the argument would be that perhaps the modern developments like batched flash auctions should just be the new baseline, and designed so that all of the participants feeding into them get an equivalent quality of fill. These "phenomena" are fairly significant. Let's say you have a 100k position in a smaller cap stock. You may move the stock down a few percent if you start walking down your order and it becomes clear that you are looking to take liquidity. Vs 100k in one of the more advanced order routes where you're basically going to get filled near mid. And of course it goes without saying that 100k won't even move the needle in the institutional routes. For a while I got so sick of it that if I was looking to buy back my short options (the same things happen in the option space, but with more slippage), I would stuff a basic midpoint algorithm on the underlying, it would be sniffed out and liquidity would evaporate, price would fall, and I'd slam the ask to buy/cover my short calls on the price drop. At least I could get a fair fill when I played two different areas of the market complex against each other... It's just a pain. To the average participant, they will find that liquidity is there when it suits the counterparty, yet not there when they need it. NBBO/best bid offer itself can be illusory. There are many situations where if you sweep the bid, you will get a fair fill, but I'd you just hit the bid price, you will essentially take off the very small front order of an iceberg order, they will run their calculations, and the liquidity pegs a cent below you if it suits them. That's how it works. This goes for all areas of the financial market, including the bond market itself, and it contributes to systemic fragility in addition to harvesting retail money. Granted, almost no retail participant is actually shipping orders directly to exchanges like I laid out. They are going to payment for order flow routes. These are actually fairly efficient, but again, remember that if you are posting a bid or ask, exchanges pay you (yes, you actually net money, albeit small) to post these orders, and anyone feeding into PFOF routes is getting this income taken from them. The frontrunning risk in the payment for order flow routes is also much more severe, since your order is getting blasted out in all directions before it is posted. So when those sorts of routes go wrong for retail traders (ex making the mistake of posting a large order during a major market event), they're could catastrophically get screwed. It's also worth noting that retail does have access to a relatively Fair auction system though. Open and closing auctions are probably the best ways to fill orders. Just be careful not to ship too much size into them since a large enough net imbalance (say in a small cap stock) in a closing auction will have the same "walk down the price" effect that happens with midpoint orders. Personally I think that the institutional flash auctions are pretty neat. For my understanding this sort of liquidity sourcing is growing. I would think that this sort of functionality could be regulated and integrated into the base level market venues.
JumpCrisscross 1y ago
> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading Wall Street (as in the sell side) is strongly incentivised to stamp out high-speed trading. It undercuts their dealer model. They have tried and failed to come up with an auction model that eliminates HFT without tradeoffs that real investors find unacceptable.
- smallmancontrov 1y ago
  Didn't HFT compete itself out of outsized profitability years ago? So now we get instant super liquidity for pennies?
  - PartiallyTyped 1y ago
    For stocks most likely, though I assume a lot of it today comes from options traders, where the spread is much wider.
  - chronic74939 1y ago
    > Didn't HFT compete itself out of outsized profitability years ago? No > So now we get instant super liquidity for pennies? Not pennies yet. Still dime and quarter range.
    - zahlman 1y ago
      Last I checked, the spread on SPY is on the order of <1 basis point.
thaumasiotes 1y ago
> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. What would that model look like? Suppose we trade infrequently but take orders whenever. A trade is coming up and the order book looks like this: buy XMPL 100 shares $0.40 buy XMPL 150 shares $0.22 sell XMPL 100 shares $0.15 sell XMPL 100 shares $0.20 sell XMPL 100 shares $0.25 sell XMPL 100 shares $0.30 We can always fill the buy order for 100 shares. How much should that guy pay?
ThinkBeat 1y ago
They could buffer a 2 second window and randomise the orders of the transactions.
andsoitis 1y ago
> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. Benefits of high-frequency trading: - Increased liquidity: improves market liquidity by ensuring there are always buyers and sellers - Tighter bid-ask spreads: High-volume trading can narrow the spread between buying and selling prices, which can lower costs for investor - Efficient price discovery: By reacting instantly to news and other data, HFT can help incorporate new information into a stock's price more quickly.
- deleted 1y ago
  [deleted]
kbelder 1y ago
I'm generally of the view that the more freedom in trading the better, but there is a concern on these ultra-high-speed trades that it ultimately prioritizes only certain blessed traders, those with expensive equipment, geographical proximity, and approved partnerships. I've thought that one fairly neutral fix would be to add a random delay to the execution time of each trade. It could be very small... like between 0 to 1 seconds. Just enough to negate the 'all or nothing' prioritizing of a slightly faster connection.

robertlagrant 1y ago

> He points out that most trades are done in the last hour, so really trading only needs to occur once a day. Presumably then the last trader has the most information, and so the game would be getting the info as late as possible and trading as late as possible, but not too late.

schlauerfox 1y ago
That's one thing that will make blockchain trading interesting as it's discreet block by block, such as the ex-dividend date who holds a stock when the dividends are paid, might make fees for that block very competitive. The SEC is really struggling now with good regulation but it's coming end of the year to draw the line in the sand.
- stuartjohnson12 1y ago
  I was going to make the old joke about discrete vs discreet but I suppose that blockchain trading is both.
  - jdonaldson 1y ago
    throw in discreate as well :)

phinnaeus 1y ago

And Australian companies often list in the US.

kasey_junk 1y ago

IEX tried this to much fanfare. Turns out most participants don’t particularly care about that as a motivating factor.

peterbonney 1y ago
I'd say IEX has done remarkably well - it's not likely to displace NASDAQ or NYSE but it has solidified its place as the #3 US exchange by any reasonable measure. If TXSE achieves comparable market share I'd call that a wild success. You're not wrong to say that most participants don't care about what IEX offers, but enough do to make a meaningful dent in trading volume.
- kasey_junk 1y ago
  It’s definitely not 3rd place. That’s cboe and it’s not close. It’s hanging around with ~2% of the trade volume. https://www.cboe.com/us/equities/market_statistics/ https://www.cboe.com/us/equities/market_statistics/ I don’t know if that is “remarkably well” but it certainly isn’t some market paradigm shift. If you were to tell me in 10 years the Texas exchange would have 2% of the market I’d believe you. But I’d still not be terribly impressed.
  - pclmulqdq 1y ago
    IEX is "3rd place" in their mind only because the other 12 exchanges are owned by two companies. IEX is 13/13 for volume, and the main reason they have any volume is because IEX sometimes has the NBBO so you have to trade there per reg NMS.
  - peterbonney 1y ago
    You're right, my view is way out of date. I didn't realize CBOE had grown so much in straight equities trading. IEX is the best of the rest, but it's NYSE, NASDAQ and (to my surprise) CBOE as the clear top 3.
- mtoner23 1y ago
  Cboe miax and memx are all doing better than IEX

twothreeone 1y ago

"Most trades" doesn't necessarily mean "most profitable trades" ;)

AaronM 1y ago

If trades were batch processed say every 5 seconds, and randomized in the case of ties would that solve the fastest connection issue?

throwawaymaths 1y ago
IIUC being fast is not as much of a problem as dropping in a bid and cancelling it at the last moment
valkmit 1y ago
Also it just changes the nature of the game. There's no incentive to interact with the batch until the absolute last microsecond. It will still be dominated by latency-sensitive participants, just in a manner where the difference between visible liquidity and latent liquidity is even more diverged from reality (on average).

pants2 1y ago

One interesting approach to this is the gas auction system in DeFi where (on Ethereum) traders bid to have their trades included first in a block, and that additional payment is burned / accretive to ETH holders. Though that turns "fastest connection" into "highest bidder" advantage. Another approach that Aztec and some others are taking is to shield all transactions with zkSNARKs such that the intent of a transaction isn't known until it's completed. Combined with deterministic block times you could force random ordering of transactions in batches, effectively mitigating the fastest connection OR highest bidder advantage.

idiotsecant 1y ago
The real question is whether we even need stock exchange organizations if we can do it all on chain without them. I think the only thing you really need is someone to handle the stock ownership credentials in the event that legal action require involuntary transfers, that sort of thing. That could be a much smaller footprint organization, I think.
- pants2 1y ago
  That's the promise of tokenized securities! Securitize + BlackRock are trying to make that happen. This should remove a lot of middlemen to the trading and settlement process.

mhh__ 1y ago

I suppose you could but the problem is that the liquidity would be either shit or more charitably very different to other exchanges that already do what they're supposed to do.

throwawaymaths 1y ago

Just make all positions irrevocable for at least 10 seconds after posting.

JumpCrisscross 1y ago
> Just make all positions irrevocable for at least 10 seconds after posting Sounds great for Wall Street. Spreads would necessarily widen as people buffer out. Meanwhile, you’ve turned every lit order into a 10-second option for market participants. Which means there is still a latency advantage to lifting or hitting a standing order first.
- throwawaymaths 1y ago
  only if you make those bids visible. the bids are held in a buffer and at the end of the buffer, it either completes a trade or appears on the order book. iirc some market tried to do this with a literal loop with a physical latency.
  - JumpCrisscross 1y ago
    > only if you make those bids visible. the bids are held in a buffer and at the end of the buffer Everyone else's bids are invisible. The ones you submit--for your self and for your customers--are not. The larger a brokerage operation you run, the more of an edge you get under this system. We created the unified tape and passed Rule NMS specifically to remove these incentives.

softwreoutthere 1y ago

why would they do that? the system is designed to reward asymmetry.

usefulcat 1y ago

> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. What would that look like? Periodic auctions? Certainly it could be done, I'm just trying to understand what problem might be solved, and whether the solution would be effective. For example, even with the opening and closing auctions we have today, there can be an advantage to getting your order accepted right before the deadline. Some participants do this, most don't really (depending on the exact definition of "right before"). But the fact that some do tells me that some participants would do the same thing with periodic auctions, and at least for them latency would still be important. If, as seems likely, latency is fundamentally important to at least some styles of trading, how do you incentivize participants to not value it?

jen20 1y ago
One option is to add a random delay to every trade, thus making high speed arbitrage substantially more difficult.
- ukd1 1y ago
  Another is to reset the clock on the auction each change
- drob518 1y ago
  I suspect that randomness of some sort is the only way. Without that, whatever the rules of the game, there is a way to somehow get a slim advantage. You can make the advantage small and the costs to try to gain it large, such that it isn’t cost effective to try, but as we’ve seen with HFT, it’s amazing how much people will spend to pick up pennies. Even a tiny gain, exploited frequently enough can be quite profitable.
- graycat 1y ago
  > random delay A Poison process. Just specify the expected value. E.g., if the expected value is 5 seconds and have gone some hours without an event, then the expected time is still 5 seconds. E.g., like the time to some radio active delay and whatever its expected value to decay is.

resters 1y ago

Reg NMS’s Order Protection Rule (Rule 611) says you can’t trade through protected NBBO quotes, outside a few narrow exceptions. That’s the letter of the law. The practical effect isn’t just a bit of latency. It rewires incentives. With 611 in place, the question for latency-sensitive firms becomes: what HFT tactics can I run that are 611-compatible? Without 611, the question would be: what HFT tactics actually add value for my counterparties? That’s a very different optimization. For firms on direct feeds (often building their own synthetic NBBO), 611 doesn’t add much information. The constraint is compliance, not discovery. Because NBBO is size-agnostic and top-of-book, anchoring execution to it lets micro-lot quotes steer outcomes. You can influence the protected price with tiny displayed size. That’s great for gamesmanship, bad for displayed depth, size-sensitive pricing, and near-touch discovery. Also: if two informed counterparties want to trade away from the protected price to reflect size or information, 611 mostly blocks that outside limited carve-outs. We lose mutually beneficial, size-aware prints to satisfy a benchmark that ignores size. On settlement, the uniform benchmark helps in calm markets. But it’s naïve to think that holds through a real black swan. In stress, timestamp ambiguities and fragmented data make “what was executable” contestable, and disputes spike regardless of quote protection. In a sound market structure, the clearer (CCP or clearing broker) should carry and underwrite that tail risk—margin, default funds, capital, and enforceable rulebooks. Instead, 611 shifts accountability onto quote-protection mechanics, insulating clearers from responsibility and, perversely, amplifying systemic risk when the system most needs well-capitalized risk absorbers.

UltraSane 1y ago
There is no reason why shares should be bought on sold in time frames far too short for anything to have meaningfully changed about the companies or market conditions.
- bawolff 1y ago
  The fact that people make money off of HFT by definition means that the market conditions have changed in those time frames.
  - 1y ago

quickthrowman 1y ago

Why would you create arbitrage opportunities for no reason? That’s the only thing that would happen I can see from an exchange that can’t keep up with the NBBO price, which you are obligated by law to quote regardless. People in the finance industry will arb between digital and human markets and net a profit from it. It seems pointless to me, but perhaps I’m not fully grasping what that would do.

snowwrestler 1y ago

Bit of an aside, but I really do not understand the concerns with trading speed. I can trade at human speed now: when I want to make a trade, I put in the order and it gets executed. Speed elsewhere in the market makes it easier, not harder, for me to trade when I want to. And I don’t care who my counterparty is; that’s a fundamental feature of a stock exchange. If A is always faster than B because A is 2 racks closer to my broker in the data center… so what? How does that hurt me? Good for A. A computer-powered trading strategy can react faster than me to news—true. But that’s fine because I don’t have to follow a breaking-news investing strategy. There are tons of others, many of which have proven to work very well.

Fade_Dance 1y ago
>How does that hurt me? Because lit orders get front run. Every sophisticated participant/algo is exceptionally efficient at extracting money from less sophisticated participants. As someone who trades decent volume but doesn't have a fully institutional grade workflow, I have the fortune of dealing with this... Simple lit orders (posting an order directly to an exchange) will be taking advantage of by both market makers, by HFTs, and by smarter execution algorithms. The algorithms running the bids and asks will widen spreads. Sell orders will peg to one cent below your ask, and if flows start to reverse, they will pull their liquidity and the slower participants get their liquidity swept through (adverse selection). The next step up is to use something like a midpoint algorithm or hidden order, but hidden orders will be pinged with one share from the robots and you will get sniffed out and positioned against. If they detect size in a midpoint algorithm, the liquidity in the opposite direction will evaporate, and they will "walk" the dumb midpoint algorithm down, take the liquidity, and then reset the mid back to where it was. The list goes on. It's generally an awful environment for "regular" participants. Moving on from simple improvements available to the more advanced retail space like midpoint algorithms and VWAP algorithms, you have algo routes that are explicitly designed to take advantage of the "lesser" order types. If they are in a position to get a fair fill, they will rest the order in case they see a situation they can take advantage of, and only take mid fill if the outlook deteriorates (this is all millisecond time frame stuff, but the orders will be worked in an automated fashion throughout the day - time frame is configurable). On the more developed institutional side, liquidity is sourced in dark venues designed to ward off HFTs and front-running, or sourced in fair flash-auctions which are again designed to ward off hfts and information leakage from the auction spawner. So the argument would be that perhaps the modern developments like batched flash auctions should just be the new baseline, and designed so that all of the participants feeding into them get an equivalent quality of fill. These "phenomena" are fairly significant. Let's say you have a 100k position in a smaller cap stock. You may move the stock down a few percent if you start walking down your order and it becomes clear that you are looking to take liquidity. Vs 100k in one of the more advanced order routes where you're basically going to get filled near mid. And of course it goes without saying that 100k won't even move the needle in the institutional routes. For a while I got so sick of it that if I was looking to buy back my short options (the same things happen in the option space, but with more slippage), I would stuff a basic midpoint algorithm on the underlying, it would be sniffed out and liquidity would evaporate, price would fall, and I'd slam the ask to buy/cover my short calls on the price drop. At least I could get a fair fill when I played two different areas of the market complex against each other... It's just a pain. To the average participant, they will find that liquidity is there when it suits the counterparty, yet not there when they need it. NBBO/best bid offer itself can be illusory. There are many situations where if you sweep the bid, you will get a fair fill, but I'd you just hit the bid price, you will essentially take off the very small front order of an iceberg order, they will run their calculations, and the liquidity pegs a cent below you if it suits them. That's how it works. This goes for all areas of the financial market, including the bond market itself, and it contributes to systemic fragility in addition to harvesting retail money. Granted, almost no retail participant is actually shipping orders directly to exchanges like I laid out. They are going to payment for order flow routes. These are actually fairly efficient, but again, remember that if you are posting a bid or ask, exchanges pay you (yes, you actually net money, albeit small) to post these orders, and anyone feeding into PFOF routes is getting this income taken from them. The frontrunning risk in the payment for order flow routes is also much more severe, since your order is getting blasted out in all directions before it is posted. So when those sorts of routes go wrong for retail traders (ex making the mistake of posting a large order during a major market event), they're could catastrophically get screwed. It's also worth noting that retail does have access to a relatively Fair auction system though. Open and closing auctions are probably the best ways to fill orders. Just be careful not to ship too much size into them since a large enough net imbalance (say in a small cap stock) in a closing auction will have the same "walk down the price" effect that happens with midpoint orders. Personally I think that the institutional flash auctions are pretty neat. For my understanding this sort of liquidity sourcing is growing. I would think that this sort of functionality could be regulated and integrated into the base level market venues.

JumpCrisscross 1y ago

> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading Wall Street (as in the sell side) is strongly incentivised to stamp out high-speed trading. It undercuts their dealer model. They have tried and failed to come up with an auction model that eliminates HFT without tradeoffs that real investors find unacceptable.

smallmancontrov 1y ago
Didn't HFT compete itself out of outsized profitability years ago? So now we get instant super liquidity for pennies?
- PartiallyTyped 1y ago
  For stocks most likely, though I assume a lot of it today comes from options traders, where the spread is much wider.
- chronic74939 1y ago
  > Didn't HFT compete itself out of outsized profitability years ago? No > So now we get instant super liquidity for pennies? Not pennies yet. Still dime and quarter range.
  - zahlman 1y ago
    Last I checked, the spread on SPY is on the order of <1 basis point.

thaumasiotes 1y ago

> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. What would that model look like? Suppose we trade infrequently but take orders whenever. A trade is coming up and the order book looks like this: buy XMPL 100 shares $0.40 buy XMPL 150 shares $0.22 sell XMPL 100 shares $0.15 sell XMPL 100 shares $0.20 sell XMPL 100 shares $0.25 sell XMPL 100 shares $0.30 We can always fill the buy order for 100 shares. How much should that guy pay?

ThinkBeat 1y ago

They could buffer a 2 second window and randomise the orders of the transactions.

andsoitis 1y ago

> Perhaps Texas could use a different trading model that doesn't require ultra high speed trading. Benefits of high-frequency trading: - Increased liquidity: improves market liquidity by ensuring there are always buyers and sellers - Tighter bid-ask spreads: High-volume trading can narrow the spread between buying and selling prices, which can lower costs for investor - Efficient price discovery: By reacting instantly to news and other data, HFT can help incorporate new information into a stock's price more quickly.

deleted 1y ago
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kbelder 1y ago

I'm generally of the view that the more freedom in trading the better, but there is a concern on these ultra-high-speed trades that it ultimately prioritizes only certain blessed traders, those with expensive equipment, geographical proximity, and approved partnerships. I've thought that one fairly neutral fix would be to add a random delay to the execution time of each trade. It could be very small... like between 0 to 1 seconds. Just enough to negate the 'all or nothing' prioritizing of a slightly faster connection.