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> The necessary change is simply this. Exchanges would have to set a price at which orders are to execute. Whenever there are excess orders in one direction or
by chollida1 12y ago
> The necessary change is simply this. Exchanges would have to set a price at which orders are to execute. Whenever there are excess orders in one direction or the other, that price would drift up or down, slowly, until the order executes.
How would this even work? Understanding Market micro structure is literally my day job and I'm having trouble parsing your proposal.
Consider the market where I want to buy at a limit of 9.90 and someone else wants to sell down to a limit of 10.00.
What price would the exchange set? People have already said the maximum the market will buy for is 9.9 and the minimum the market will sell for is 10.
if there is no overlap you just cant' trade no matter what the exchange does.
- jedberg 12y ago> if there is no overlap you just cant' trade no matter what the exchange does. How does HFT change that?
- tptacek 12y agoBy literally creating the overlap.
- jedberg 12y agoHow does HFT create the overlap when the seller is at 10 and buyer is at 9.9? I don't understand what the HFT provides that closes the gap.
- kasey_junk 12y agoThe HFT sees that there is a 10 cent gap and decides to put 2 new orders into the market, 1 sell at 9.99 and another buy at 9.91. Now the spread is 8 cents. Anyone who wanted to buy can now buy it at a penny cheaper than an instant ago and the opposite holds true for anyone wanting to sell.
- btilly 12y agoWhat I am describing is not how markets work today, so you can't understand it by thinking in terms of how markets work today. Today the price is the price at which the last transaction happened. I am proposing instead that the price is set and updated by the exchange, and transactions only happen when they can execute at the exchange price. And the exchange price moves at a preset rate - down if there are outstanding sell orders, up if there are outstanding buy orders, else still. So in your situation the price would wind up somewhere between 9.9 and 10, then stay indefinitely until another order began moving the price. Basically for someone placing an order you're losing the ability to trade instantly, and gaining the prospect of trading at a possibly better price. Therefore you don't need a pool of people trying to give you instant trades.