6 ms·

Can someone explain why any of these is a bad idea? (a) completed transaction tax; (b) regulatory fee on offers/cancellations; (c) insertion of random delays in

by dbrower 13y ago

Can someone explain why any of these is a bad idea? (a) completed transaction tax; (b) regulatory fee on offers/cancellations; (c) insertion of random delays into offers/cancellations; All could increase friction and reduce the speculative/arbitrage opportunities, while having little effect on those wanting to trade to hold for periods exceeding seconds. There is a belief that the churn of HFTs/Arbs is enhancing liquidity for "real" investors. There ought to be reasonable questions what amount of churn is useful, adequate, and whether some frothy levels should be constrained in some way. Is there any way to decide when things are excessivly liquid, in ways that lead to undesirable effects?

kasey_junk 13y ago
Any tax you propose will reduce the amount of the taxed thing and introduce unintended consequences. So we have to ask why do you want less transactions or orders? It won't reduce HFT activity for instance. It will just mean that HFT systems will only make more profitable trades. That means higher bid/ask spreads and higher risk limits leading to higher volatility. It also may have the unintended consequence of consolidating more volume into smaller firms. That doesn't seem to be in anyone's best interest. As for latency games the issue is not the overall latency it is fifo priority matching. Without changing that bouncing trading signals off of mars won't help.
- dbrower 13y ago
  I think a reasonable question is why we consider /more/ transactions a good thing, if a large fraction of them are for holding periods in small number of seconds. I think I am questioning the fifo paradigm, which creates these arbitrage opportunities, especially when there are multiple fifo queues representing multiple markets. It is not clear to me that batching things in 1 sec increments, and randomizing the our ordering would be bad or unfair. I also don't see why a modest fee that would make short-hold transactions for tiny gains is a bad thing. Structuring the system to reward HFT latency advantages seems opposed to stability, if one believes that the market is for actual investments. HFT seems to be a second order phenomenon that games the system, and may have come to dwarf what could be called legitimate investment. At what point is there "enough" liquidity, and when is "too much"? I suspect the people who do HFT and other arb techniques think there is no such thing as too much, because they profit on the churn. Others see this as producing nothing of societal value, extracting real money from the system that could be used for other purposes.
  - kasey_junk 13y ago
    "I think a reasonable question is why we consider /more/ transactions a good thing, if a large fraction of them are for holding periods in small number of seconds" I don't want to put words in your mouth, but can we at least say that transaction count is not what we are actually interested in? In a vacuum we (larger society) don't care a whit about the number of transactions that occur? "It is not clear to me that batching things in 1 sec increments, and randomizing the our ordering would be bad or unfair." It is clear to me that batching things in 1 sec increments would be as unfair to someone as the current system (I'm sorry to not back this up, but I've been doing a ton of commenting about it in the last few days and don't have the patience I did). It's possible that this unfairness is "better" for society overall. I don't know how to quantify that. "I also don't see why a modest fee that would make short-hold transactions for tiny gains is a bad thing." My "expert" opinion on market making strategies is that this would increase the bid/ask spread and volatility in the market. Further my opinion is that this is a bad thing for retail investors and market makers, to the advantage of large institutional investors. I don't have the stamina to prove this assertion. "Structuring the system to reward HFT latency advantages seems opposed to stability, if one believes that the market is for actual investments." This is a common simplification that I think deserves a lot of thought. Many folks on Hacker News think that the market is for "investment". Usually they equate this to "bootstrapping enterprises that aren't viable without external money". This is an obvious bias for an internet forum dedicated to startups to have. In reality, the vast majority of market forces are not about that. They are about risk mitigation. So when you say that HFT "dwarfs" legitimate investment, are you saying it doesn't provide a valid mode for bootstraping enterprises, or are you saying it doesn't help with risk mitigation? Your answer to that question means a lot for how we debate the topic. A similar answer is available for your assertion that HFT is a second order phenomenon. As for when is there enough liquidity? I'd say when people stop paying for it. Which hasn't happened yet. Paying for liquidity is reaching a saturation point, because it has gotten so cheap. This is most obviously demonstrated by the massive loss in value that HFT groups have had in the last 5 years. If anything we have too much liquidity, and that comes from someone who's paycheck comes from an HFT.
    - harryh 13y ago

by dbrower 13y ago

kasey_junk 13y ago

Any tax you propose will reduce the amount of the taxed thing and introduce unintended consequences. So we have to ask why do you want less transactions or orders? It won't reduce HFT activity for instance. It will just mean that HFT systems will only make more profitable trades. That means higher bid/ask spreads and higher risk limits leading to higher volatility. It also may have the unintended consequence of consolidating more volume into smaller firms. That doesn't seem to be in anyone's best interest. As for latency games the issue is not the overall latency it is fifo priority matching. Without changing that bouncing trading signals off of mars won't help.

dbrower 13y ago
I think a reasonable question is why we consider /more/ transactions a good thing, if a large fraction of them are for holding periods in small number of seconds. I think I am questioning the fifo paradigm, which creates these arbitrage opportunities, especially when there are multiple fifo queues representing multiple markets. It is not clear to me that batching things in 1 sec increments, and randomizing the our ordering would be bad or unfair. I also don't see why a modest fee that would make short-hold transactions for tiny gains is a bad thing. Structuring the system to reward HFT latency advantages seems opposed to stability, if one believes that the market is for actual investments. HFT seems to be a second order phenomenon that games the system, and may have come to dwarf what could be called legitimate investment. At what point is there "enough" liquidity, and when is "too much"? I suspect the people who do HFT and other arb techniques think there is no such thing as too much, because they profit on the churn. Others see this as producing nothing of societal value, extracting real money from the system that could be used for other purposes.
- kasey_junk 13y ago
  "I think a reasonable question is why we consider /more/ transactions a good thing, if a large fraction of them are for holding periods in small number of seconds" I don't want to put words in your mouth, but can we at least say that transaction count is not what we are actually interested in? In a vacuum we (larger society) don't care a whit about the number of transactions that occur? "It is not clear to me that batching things in 1 sec increments, and randomizing the our ordering would be bad or unfair." It is clear to me that batching things in 1 sec increments would be as unfair to someone as the current system (I'm sorry to not back this up, but I've been doing a ton of commenting about it in the last few days and don't have the patience I did). It's possible that this unfairness is "better" for society overall. I don't know how to quantify that. "I also don't see why a modest fee that would make short-hold transactions for tiny gains is a bad thing." My "expert" opinion on market making strategies is that this would increase the bid/ask spread and volatility in the market. Further my opinion is that this is a bad thing for retail investors and market makers, to the advantage of large institutional investors. I don't have the stamina to prove this assertion. "Structuring the system to reward HFT latency advantages seems opposed to stability, if one believes that the market is for actual investments." This is a common simplification that I think deserves a lot of thought. Many folks on Hacker News think that the market is for "investment". Usually they equate this to "bootstrapping enterprises that aren't viable without external money". This is an obvious bias for an internet forum dedicated to startups to have. In reality, the vast majority of market forces are not about that. They are about risk mitigation. So when you say that HFT "dwarfs" legitimate investment, are you saying it doesn't provide a valid mode for bootstraping enterprises, or are you saying it doesn't help with risk mitigation? Your answer to that question means a lot for how we debate the topic. A similar answer is available for your assertion that HFT is a second order phenomenon. As for when is there enough liquidity? I'd say when people stop paying for it. Which hasn't happened yet. Paying for liquidity is reaching a saturation point, because it has gotten so cheap. This is most obviously demonstrated by the massive loss in value that HFT groups have had in the last 5 years. If anything we have too much liquidity, and that comes from someone who's paycheck comes from an HFT.
  - harryh 13y ago