5 ms·

Do you mean the high level of opacity? There is considerably more opacity than in non-electronic trading, surely (everything on record, all data public, no effe

by sambe 12y ago

Do you mean the high level of opacity? There is considerably more opacity than in non-electronic trading, surely (everything on record, all data public, no effect from personal relationships etc)?

tptacek 12y ago
I can't tell whether you're suggesting that "HFT" (heavily automated electronic trading) is more opaque than human trading (ie, the specialist system), but for what it's worth there's a right answer to this question: human market makers are WAY less transparent than algorithms are. Here's a benchmark: human market makers rigged the public markets so that tradable instruments were quoted in fractions of a dollar, rather than in pennies, so they could surreptitiously increase spreads. It's hard to get more brazen than that.
- hft_throwaway 12y ago
  Human specialists and locals usually either had a monopoly on their product or were buddies with everyone in the pit so of course they would collude. Even on the NASDAQ screen they would collude and intimidate anyone showing tighter prices for showing "Chinese quotes": http://www.acsu.buffalo.edu/~keechung/TEM/Journal%20Articles/Collusion%20A%201994.pdf http://www.acsu.buffalo.edu/~keechung/TEM/Journal%20Articles... Anonymous limit order books are far better. Nobody's price is better than anyone else's and machines have no problem competing spreads down to near-zero.
- minimax 12y ago
  human market makers rigged the public markets so that tradable instruments were quoted in fractions of a dollar, rather than in pennies, so they could surreptitiously increase spreads. I don't think this is right. Erh, obviously U.S. equities traded in quarters and eights (and later sixteenths before decimalization), but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature. They could have moved to decimals and still kept the minimum price variation above a penny†, or they could have just added more fractions (32nds, 64ths, 128ths) that would have moved the minimum price variation into roughly the range you get by quoting in decimals. If you think quoting in 128ths sounds silly I won't argue with you, but it's something they do actually do for the US treasury futures contracts on the CME††. I suspect that they just used what worked. In a market of human traders, it's much easier to deal with large round numbers. I think that's why odd lots were treated specially too. E.g. It's a lot easier for humans to keep track of 5000 shares at 50 1/2 than in 100 small orders from 200 shares to 5 shares all priced between 50.40 and 50.60. As markets adopted technology, they naturally moved to a smaller minimum price variation (and eliminated the special treatment of odd lots) because computers don't have any problems dealing with an aggregate of small orders vs one big order. † They are actually talking about doing this for some small cap stocks later this year. http://online.wsj.com/news/articles/SB10001424052702304275304579396861123381346 http://online.wsj.com/news/articles/SB1000142405270230427530... †† ctrl-f "Quotation Practices" -- http://www.cmegroup.com/education/files/understanding-treasury-futures.pdf http://www.cmegroup.com/education/files/understanding-treasu...
  - tptacek 12y ago
    https://www.sec.gov/litigation/investreport/nd21a-report.txt https://www.sec.gov/litigation/investreport/nd21a-report.txt Search "odd-eighth". Decimalization drastically reduced spreads. Scott Patterson suggested in _Dark Pools_ that it literally put many human market makers out of business; in other words: those human market makers were kept afloat by the gross inefficiency of quoting prices in 8ths and 16ths, an inefficiency that was taken out of the hides of investors.
    - minimax 12y ago
      I was really just trying to make the points that 1) the minimum price variation of 1/8 of a dollar probably made sense at some point in the past (NYSE being started in the early 19th century) 2) sometimes it's more than just market makers who want larger tick sizes (consider this post from a managing partner at Andreesen Horowitz†) and 3) you can reduce the minimum price variation (the "tick size") without doing decimalization (i.e. smaller fractions) and vice versa -- you can set the minimum price variation at sizes larger than a penny even with decimalized quotations. † http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class/ http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class...
      - tptacek 12y ago
        I'm not sure what this comment means. You said, earlier: "but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature." I think I refuted that, effectively. Can you artificially inflate spreads without making inflated spreads the explicit law of the market by quoting in 1/8ths? Sure. Is that what happens? No.
        minimax 12y ago
        I thought you were making a distinction between quoting in fractions of a dollar vs quoting in pennies. It isn't really material. If you quote in fractions but allow the minimum price variation to be 1/128th of a dollar you have a market that allows for tighter spreads than one in which the minimum price variation is a penny. There is nothing wrong with prices in fractions of a dollar. What matters is the minimum price variation a.k.a. the tick size.

by sambe 12y ago

Do you mean the high level of opacity? There is considerably more opacity than in non-electronic trading, surely (everything on record, all data public, no effect from personal relationships etc)?

tptacek 12y ago

I can't tell whether you're suggesting that "HFT" (heavily automated electronic trading) is more opaque than human trading (ie, the specialist system), but for what it's worth there's a right answer to this question: human market makers are WAY less transparent than algorithms are. Here's a benchmark: human market makers rigged the public markets so that tradable instruments were quoted in fractions of a dollar, rather than in pennies, so they could surreptitiously increase spreads. It's hard to get more brazen than that.

hft_throwaway 12y ago
Human specialists and locals usually either had a monopoly on their product or were buddies with everyone in the pit so of course they would collude. Even on the NASDAQ screen they would collude and intimidate anyone showing tighter prices for showing "Chinese quotes": http://www.acsu.buffalo.edu/~keechung/TEM/Journal%20Articles/Collusion%20A%201994.pdf http://www.acsu.buffalo.edu/~keechung/TEM/Journal%20Articles... Anonymous limit order books are far better. Nobody's price is better than anyone else's and machines have no problem competing spreads down to near-zero.
minimax 12y ago
human market makers rigged the public markets so that tradable instruments were quoted in fractions of a dollar, rather than in pennies, so they could surreptitiously increase spreads. I don't think this is right. Erh, obviously U.S. equities traded in quarters and eights (and later sixteenths before decimalization), but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature. They could have moved to decimals and still kept the minimum price variation above a penny†, or they could have just added more fractions (32nds, 64ths, 128ths) that would have moved the minimum price variation into roughly the range you get by quoting in decimals. If you think quoting in 128ths sounds silly I won't argue with you, but it's something they do actually do for the US treasury futures contracts on the CME††. I suspect that they just used what worked. In a market of human traders, it's much easier to deal with large round numbers. I think that's why odd lots were treated specially too. E.g. It's a lot easier for humans to keep track of 5000 shares at 50 1/2 than in 100 small orders from 200 shares to 5 shares all priced between 50.40 and 50.60. As markets adopted technology, they naturally moved to a smaller minimum price variation (and eliminated the special treatment of odd lots) because computers don't have any problems dealing with an aggregate of small orders vs one big order. † They are actually talking about doing this for some small cap stocks later this year. http://online.wsj.com/news/articles/SB10001424052702304275304579396861123381346 http://online.wsj.com/news/articles/SB1000142405270230427530... †† ctrl-f "Quotation Practices" -- http://www.cmegroup.com/education/files/understanding-treasury-futures.pdf http://www.cmegroup.com/education/files/understanding-treasu...
- tptacek 12y ago
  https://www.sec.gov/litigation/investreport/nd21a-report.txt https://www.sec.gov/litigation/investreport/nd21a-report.txt Search "odd-eighth". Decimalization drastically reduced spreads. Scott Patterson suggested in _Dark Pools_ that it literally put many human market makers out of business; in other words: those human market makers were kept afloat by the gross inefficiency of quoting prices in 8ths and 16ths, an inefficiency that was taken out of the hides of investors.
  - minimax 12y ago
    I was really just trying to make the points that 1) the minimum price variation of 1/8 of a dollar probably made sense at some point in the past (NYSE being started in the early 19th century) 2) sometimes it's more than just market makers who want larger tick sizes (consider this post from a managing partner at Andreesen Horowitz†) and 3) you can reduce the minimum price variation (the "tick size") without doing decimalization (i.e. smaller fractions) and vice versa -- you can set the minimum price variation at sizes larger than a penny even with decimalized quotations. † http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class/ http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class...
    - tptacek 12y ago
      I'm not sure what this comment means. You said, earlier: "but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature." I think I refuted that, effectively. Can you artificially inflate spreads without making inflated spreads the explicit law of the market by quoting in 1/8ths? Sure. Is that what happens? No.
      - minimax 12y ago
        I thought you were making a distinction between quoting in fractions of a dollar vs quoting in pennies. It isn't really material. If you quote in fractions but allow the minimum price variation to be 1/128th of a dollar you have a market that allows for tighter spreads than one in which the minimum price variation is a penny. There is nothing wrong with prices in fractions of a dollar. What matters is the minimum price variation a.k.a. the tick size.