5 ms·
The approach touted by the 60Minutes piece, the coop-like IEX market that aims to equalize participant lags, is one obvious countermeasure. Another promising t
by gojomo 13y ago
The approach touted by the 60Minutes piece, the coop-like IEX market that aims to equalize participant lags, is one obvious countermeasure.
Another promising tactic could be the "Frequent Batch Auctions" as described in the paper referenced in this blog post:
http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and-shim-on-high.html?spref=tw http://johnhcochrane.blogspot.com/2014/02/budish-cramton-and...
Direct paper link: http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...
Paper abstract:
We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.
- minimax 13y agoIn a batch auction like that you still have a latency game. There is no reason to submit your order until the last possible moment since you will want to incorporate as much information from other markets and news sources as possible. You would just end up with a crush of orders in the last 100 uS of the batch interval.
- RoboTeddy 13y agoI haven't read the paper, but I would guess that the one-second-worth of orders in each batch are secret until the batch executes
- sseveran 13y agoDoesn't matter. There is still the incentive for low latency.
- Dylan16807 13y agoA much smaller and less exploitable incentive. A few milliseconds of info from other news sources is not abusive as far as I know. Unlike the ability to react to pending trades before they happen.
- sseveran 13y agoYou are obviously not involved in the trading. A few milliseconds definitely matters. And how would you react to a "pending" trade before it happens?
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- omonra 13y agoI think you are conflating two types of information that can be taken advantage of: 1) Information about other orders coming into the system 2) Information about world events that may affect stock prices The whole point of HFT is extracting maximum information from (1) and using it to make money (supposedly from slower market participants). That is what batch auctions would remove. Nobody minds if people make money from the second type of information - but it is many orders of magnitude less frequent (ie how many times a day are there economic releases or earnings posted)?
- dpcheng2003 13y agoFrom the 60 Minutes piece: http://www.cbsnews.com/news/is-the-us-stock-market-rigged/ http://www.cbsnews.com/news/is-the-us-stock-market-rigged/
- madaxe_again 13y agoAh, a band-aid on a band-aid. What was wrong with open outcry? Sure, you had to physically be there, but nothing has changed - traders still cluster around exchanges to keep latency low, HFT kit still lives "on the floor", and what was once done with humans and bits of paper is now done in a far less efficient fashion with computers. Less, because the marginal benefit ends up going into the pockets of those who can afford exchange co-lo and mountains of hardware to parse FIX a tick faster than the other guy, meaning that the rest of the market ends up suffering, and not having a more efficient fill mechanism, as touted. HFT is that asshole who takes his umbrella with him into the pit, and blocks your trades. If anything, the solution here is to abolish algorithmic trading, and decrease tick resolution substantially, which if lengthened enough, would take C out of the question and make the entire market equally accessible to all. I mean, seriously - does the value of Brent light sweet actually change thousands of times per second? According to the markets, yes, according to reality, where people buy futures with straddles/swaps so as to have a fixed, manageable cost, no. The entire thing is un-necessary, and doesn't add value to humans.
- smoorman1024 13y agoThe most obvious and simplest thing wrong with open outcry and human market makers is the number of specialists that it takes to handle a full universe of stocks. A small electronic trading team can provide/take liquidity in 8000 stocks or greater. If you need specialists you are going to have to provide a living salary for every single specialist who will only be able to handle 20 stocks at most. The cost of trading for the end consumer is higher.
- madaxe_again 13y ago> The cost of trading for the end consumer is higher. What about when you factor in the artificially elevated buys and artificially depressed sells as a result of HFT?
- smoorman1024 13y agoWhat specifically are you referring to?
- murbard2 13y agoMy favorite solution to the breakdown of correlation is to have order books for beta adjusted prices. That is, you don't bid for Google stocks, you bid for a Google stock minus an equivalent amount of S&P. The price of this pair is much more stable than the price of Google, which means spreads can be tighter. The nuttier generalization would be to have an order book for each principal component of the covariance matrix of the market. It wouldn't work in practice for a variety of reason (least of which is that the covariance matrix is unstable, ill defined, etc) but it's a good thought experiment to understand the problem.
- tdaltonc 13y agoThis is an interesting idea. For this to impact market correlation, would you need to insist that everyone place their orders in beta adjusted terms or would it be enough for the bid making protocol to allow for it?
- murbard2 13y agoAllowing it is enough, and you could populate it initially by deriving quote from the other books. The CME does it for futures.