3 ms·

The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that al

The problem is that market making is different than the critique, which is that having privileged access to exchange data centers is an unfair advantage that allows rent-seeking. To access information before the general public allows traders to inject themselves into transactions that don't require a market maker. That fact that no one will defend this practice while vehemently defending "HFT" speaks to an impedance mismatch. We're not talking about the same thing.

harryh 13y ago
They have faster access to exchange data centers because they paid for it. Anyone can pay for this access. They use this privileged access to provide faster and cheaper service to their customers (purchasers of liquidity). It's no different than McDonalds paying a lot of money to buy a prime corner location to build one of their restaurants.
- danielnaab 13y ago
  You can pay for a lot of things, but that doesn't mean it's in the interest of society or the market as a whole. You don't require faster access to provide liquidity, but it sure helps with arbitraging trading activity.
  - tptacek 13y ago
    You can pay for a lot of things and that doesn't mean it's not in the interest of society or the market as a whole either. The trading in any one instrument on an exchange is a zero-sum game, but the structure of the market and the relationship between exchanges, buy-side firms, sell-side firms, and retail investors doesn't have to be. Before electronic trading, the specialists who executed orders on the NYSE floor ALSO paid shitloads of money for their access. One difference between today and the heyday of the specialist system is that in the specialist system, middlemen skimmed overtly from investors: the bid-ask spread was gigantic, and all that money went to the middlemen.
    - gnopgnip 13y ago
      The increased liquidity/ reduced execution risk changes it from a zero sum game.
  - harryh 13y ago
    What's wrong with arbitraging trading activity? If MSFT is trading for $50.00 on one exchange and $51.00 on another we want someone to fix that price discrepancy! Even if the difference is much smaller we want that balance to be corrected!
  - danielnaab 13y ago
    This seems like a back and forth that's quibbling about words. I didn't say there's anything wrong with arbitrage; the critique is the privileged access to market information and the ability to profit off it without adding any value to the rest of the market. All things equal, I would prefer to trade on an exchange that makes an effort to provide equal access, and one that doesn't artificially inject middlemen into transactions that don't require them.
    - harryh 13y ago
      The way that you think middlemen inject themselves into transactions that don't require them isn't what happens in the actual world. You're worried about a problem that doesn't exist.
      - danielnaab 13y ago
        Well, Googling for research around latency arbitrage lends me to believe the opposite.
        hft_throwaway 13y ago
        WTF is "latency arbitrage"? All arbitrages are short-lived and latency sensitive. It's a marketing term made up by fear mongers.
        001sky 13y ago
        Along these lines, a note on so-called latency arbitrage: http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec38-wah.pdf http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec3...
      - 001sky 13y ago
        You're worried about a problem that doesn't exist. Even if empirically it is non-observed, its illegal. So it is a problem, just one solved by law. Now, IFF your're willing to assume that nobody has ever/will ever transgressed such a law...you could hold this position 'logically'. But Few would be so unwise "in the actual world" to do so (and would likely prove foolish).
  - hft_throwaway 13y ago
    You could not be more wrong. Providing liquidity at a razor thin spread is one of the toughest trades out there. Think about it: every passive order I place gives someone the option to trade with me until I can update it. If my price is wrong and I don't update, I will trade every time. If my price is right, I'll trade some of the time if I'm lucky. If I can tilt those odds in my favor by pricing more intelligently/quickly, my trades with uninformed traders slightly subsidize my losses to informed traders. Someone taking out/arbing a market needs a source of alpha. I need to protect myself from every source of alpha, at least on average. If market makers weren't collocated and looking at many exchange/products for data to price their markets, they would be driven out by fast liquidity takers, forced to quote lower size or a wider spread until they simply stopped getting trades (other faster, smarter market makers could still quote tighter spreads and would take all your market share).
    - danielnaab 13y ago
      The question is: do you require pricing data in advance of those you are trading with to earn your spread? If you do, you are not providing a service to the market.
deleted 13y ago
[deleted]

harryh 13y ago

They have faster access to exchange data centers because they paid for it. Anyone can pay for this access. They use this privileged access to provide faster and cheaper service to their customers (purchasers of liquidity). It's no different than McDonalds paying a lot of money to buy a prime corner location to build one of their restaurants.

danielnaab 13y ago
You can pay for a lot of things, but that doesn't mean it's in the interest of society or the market as a whole. You don't require faster access to provide liquidity, but it sure helps with arbitraging trading activity.
- tptacek 13y ago
  You can pay for a lot of things and that doesn't mean it's not in the interest of society or the market as a whole either. The trading in any one instrument on an exchange is a zero-sum game, but the structure of the market and the relationship between exchanges, buy-side firms, sell-side firms, and retail investors doesn't have to be. Before electronic trading, the specialists who executed orders on the NYSE floor ALSO paid shitloads of money for their access. One difference between today and the heyday of the specialist system is that in the specialist system, middlemen skimmed overtly from investors: the bid-ask spread was gigantic, and all that money went to the middlemen.
  - gnopgnip 13y ago
    The increased liquidity/ reduced execution risk changes it from a zero sum game.
- harryh 13y ago
  What's wrong with arbitraging trading activity? If MSFT is trading for $50.00 on one exchange and $51.00 on another we want someone to fix that price discrepancy! Even if the difference is much smaller we want that balance to be corrected!
- danielnaab 13y ago
  This seems like a back and forth that's quibbling about words. I didn't say there's anything wrong with arbitrage; the critique is the privileged access to market information and the ability to profit off it without adding any value to the rest of the market. All things equal, I would prefer to trade on an exchange that makes an effort to provide equal access, and one that doesn't artificially inject middlemen into transactions that don't require them.
  - harryh 13y ago
    The way that you think middlemen inject themselves into transactions that don't require them isn't what happens in the actual world. You're worried about a problem that doesn't exist.
    - danielnaab 13y ago
      Well, Googling for research around latency arbitrage lends me to believe the opposite.
      - hft_throwaway 13y ago
        WTF is "latency arbitrage"? All arbitrages are short-lived and latency sensitive. It's a marketing term made up by fear mongers.
        001sky 13y ago
        Along these lines, a note on so-called latency arbitrage: http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec38-wah.pdf http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec3...
    - 001sky 13y ago
      You're worried about a problem that doesn't exist. Even if empirically it is non-observed, its illegal. So it is a problem, just one solved by law. Now, IFF your're willing to assume that nobody has ever/will ever transgressed such a law...you could hold this position 'logically'. But Few would be so unwise "in the actual world" to do so (and would likely prove foolish).
- hft_throwaway 13y ago
  You could not be more wrong. Providing liquidity at a razor thin spread is one of the toughest trades out there. Think about it: every passive order I place gives someone the option to trade with me until I can update it. If my price is wrong and I don't update, I will trade every time. If my price is right, I'll trade some of the time if I'm lucky. If I can tilt those odds in my favor by pricing more intelligently/quickly, my trades with uninformed traders slightly subsidize my losses to informed traders. Someone taking out/arbing a market needs a source of alpha. I need to protect myself from every source of alpha, at least on average. If market makers weren't collocated and looking at many exchange/products for data to price their markets, they would be driven out by fast liquidity takers, forced to quote lower size or a wider spread until they simply stopped getting trades (other faster, smarter market makers could still quote tighter spreads and would take all your market share).
  - danielnaab 13y ago
    The question is: do you require pricing data in advance of those you are trading with to earn your spread? If you do, you are not providing a service to the market.

deleted 13y ago

[deleted]