8 ms·

I don't understand why HFT is still around, if it's considered a problem. Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tic

I don't understand why HFT is still around, if it's considered a problem. Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? Like, right now it appears that trades occur instantly. Instead, queue requests and have the trades occur only once a second. Or 5 seconds. Would this work? I'm assuming that either there's no motivation to solve the problem, or there are difficulties that I'm unaware of. --- I've been wondering this about HFT for a while and this seemed like a good place to ask. Then I went back and finished reading the article, and this solution is proposed at the end. Curious about whether it would work on not.

joosters 12y ago
You should read to the end of the article, where they discuss exactly this kind of solution.
- tfinniga 12y ago
  Yup, just got there. Oops.
harmegido 12y ago
Been trying to figure this out myself. What if we have 3 offers and 2 bids crossing at the same price after the 1 second tick is up. Which two offers get filled? If the answer is, the first two, then you've solved nothing. Maybe you randomize it? That could bring up some interesting issues.
- harryh 12y ago
  Ya, if you randomize it than I have in incentive to submit more bids than I actually want filled because I've estimated what my fill rate is going to be. Of course everyone else has that incentive too which is going to negatively effect my fill rate which seems like it would lead to a pretty unstable system.
crdoconnor 12y ago
>I don't understand why HFT is still around, if it's considered a problem. Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power. >Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?". An almost microscopic tax on transactions would prevent it, though while having a minimal impact on all other trading activity.
- joosters 12y ago
  Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?" The lack of live market book data means that you won't need the ultra fast connections, so at least one part of the networking arms race becomes de-weaponised. You still have the problem of it being advantageous to bid at the end of the auction, but this could be solved by pricing. Just like the exchanges give incentives to offer prices rather than to take them, they could make bidding at the start of an auction cheaper than at the end of it.
- yummyfajitas 12y ago
  This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. (You can ballpark the numbers by multiplying trade volume by the spread.) For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. HFT is tiny, a drop in the bucket compared to the rest of the financial industry. Further, many big players in the industry are against HFT since HFT reduces their information advantage over smaller players [2]. The danger in a 1-second tick is that a) a massive change like this is hard to do [3] and b) it would likely increase volatility. A stylized fact of dynamical systems is that continuous feedback reduces volatility, whereas discrete step sizes increase it - witness how many numerical ODE solvers can blow up even while the underlying ODE is stable. [1] https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYIVNiUNcqfrAHHp4GoCA https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYI... [2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr... [3] Bloomberg, Excel and other calculators contain mathematical errors (e.g., "weekends are sometimes treated as a business day for the purpose of interest accrual") which cannot be fixed because the change would be too disruptive.
guiomie 12y ago
I believe the exchanges have no interest in "solving" HFT since they make a good amount of dinero around it. IEX has made a business out of 1 second delay (700ms actually).
- kasey_junk 12y ago
  IEX has made a business out of being a dark pool explicitly designed for buy side hedge funds to be able to avoid market forces. The 700ms delay is the least of those features & is more of a marketing gimic.
- minimax 12y ago
  The IEX order entry delay is 350 microseconds (one way). Considerably less than even a millisecond.
  - guiomie 12y ago
    My bad. It does say micro second on wikipedia, and I used the wrong unit abbreviation.
- yummyfajitas 12y ago
  HFTs nearly all provide liquidity rather than take it, which means that the exchange pays them to trade. You are simply wrong - the exchange loses money on most HFTs. https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_... http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 Ask yourself: why would the exchanges pay market makers to provide liquidity?
  - crdoconnor 12y ago
    HFTs provide far more liquidity than is ever needed during normal periods and during periods of market distress (when liquidity is sorely needed) they suddenly and sharply withdraw that liquidity from the market.
bluecalm 12y ago
>>Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? There are several arguments against it: 1)liquidity is good(1), more liquidity is better; why artificially limit liquidity, just let people provide as much as needed at as low price as market dictates; 2)Options are good(2), limiting liquidity increases prize of certain options (as issuer needs liquidity to offer options and the less liquidity there is the more expensive issuing those becomes, the effect might be small between 1s and 0s but it's still there) 3)Certain types of arbitrage would be less efficient. Arbitrage is good(3). (1)-the concept of liquidity is that when you have some goods you want to sell, you don't need to invest time/effort/money to sell it; that in turns frees your time to do productive stuff; the effect is obvious in situations like retail stores buying from manufacturer (so manufacturer don't need to do advertising, building stores etc. themselves so they have more resources to actually produce goods); the effect doesn't disappear magically at 1 second scale, more liquidity (faster, cheaper) is always better for overall productivity. (2)-options allow certain ventures which normally would be too high variance (forgive the gambling term) to pursue; they are form of insurance; reducing risk is almost always good but it costs to provide; the lower the prize, the better; (3)-arbitrage is good because the prices of goods/stocks become close to true value; we want that, we also want to pay for that as little as possible; the more effective the arbitrage the better, why stop at 1 second, when you can have cheaper/better ? This is not the whole story but those points are clear benefits of HFT. Liquidity is cheaper today than it ever was. Spreads are the lowest as well. Some people who used to make bank charging ridiculous spreads are now not making bank - this again is great. The arms race argument is that resources go into something counter-productive (like stockpiling nukes) instead into something productive. In case of HFT resources (at least some of the time) go into something desirable. It is a race but it is a race to improve desirable things (liquidity, arbitrage). You rarely hear argument about "arm race" in situations like that. It's usually called progress. Usually we applaud progress in situations where service provides needs to compete to offer the best/cheapest product. In case of HFT this point is often somehow overlooked.
- dalore 12y ago
  How does 1 second ticks stop liquidity and arbitrage? It just stops the faster connections wins. HFT aren't really adding liquidity since they only buy when they can sell straight away. So there was already a liquid purchase there. Arbitrage, if something is cheaper elsewhere, the 1 second tick will still bring the price into parity.
cynicalkane 12y ago
HFT gives me a minor amount of hope for our regulatory environment: the forces and popular opinion of Big Finance all oppose it, but regulators continue to allow it. The short answer is that HFT is like Wal-Mart: it's trendy and cool to complain about it, but in terms of providing better and faster inventory to ordinary customers, it works better than everything that came before. Except Wal-Mart is hated for being (allegedly) bad for poor workers, electronic trading's victims have primarily been the Wall Street old boys' club. Why the public is convinced this is a bad thing is beyond me.
- harryh 12y ago
  This is what really sucks about that Michael Lewis book. He could have told a great story to the public about how everything they had been told was wrong and that the HFT nerds (just like the baseball nerds) had used technology to make the world a better place. He has the talent to do this so well. But he fucked up and bought the story the buy side scammers were selling him hook, line, and sinker. It's such a bummer.
  - conistonwater 12y ago
    Some stories are hard to tell, and even harder to sell.
    - harryh 12y ago
      Of course. I do think there is a great story to tell and sell here though. Matt Levine took a stab at explaining what that story could look like: http://www.bloombergview.com/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders http://www.bloombergview.com/articles/2014-03-31/michael-lew...

joosters 12y ago

You should read to the end of the article, where they discuss exactly this kind of solution.

tfinniga 12y ago
Yup, just got there. Oops.

harmegido 12y ago

Been trying to figure this out myself. What if we have 3 offers and 2 bids crossing at the same price after the 1 second tick is up. Which two offers get filled? If the answer is, the first two, then you've solved nothing. Maybe you randomize it? That could bring up some interesting issues.

harryh 12y ago
Ya, if you randomize it than I have in incentive to submit more bids than I actually want filled because I've estimated what my fill rate is going to be. Of course everyone else has that incentive too which is going to negatively effect my fill rate which seems like it would lead to a pretty unstable system.

crdoconnor 12y ago

>I don't understand why HFT is still around, if it's considered a problem. Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power. >Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?". An almost microscopic tax on transactions would prevent it, though while having a minimal impact on all other trading activity.

joosters 12y ago
Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?" The lack of live market book data means that you won't need the ultra fast connections, so at least one part of the networking arms race becomes de-weaponised. You still have the problem of it being advantageous to bid at the end of the auction, but this could be solved by pricing. Just like the exchanges give incentives to offer prices rather than to take them, they could make bidding at the start of an auction cheaper than at the end of it.
yummyfajitas 12y ago
This is silly. HFT is a $10-50B/year industry, depending on who's numbers you go with. (You can ballpark the numbers by multiplying trade volume by the spread.) For comparison, Morgan Stanley alone made $8B in profit in the last quarter [1]. HFT is tiny, a drop in the bucket compared to the rest of the financial industry. Further, many big players in the industry are against HFT since HFT reduces their information advantage over smaller players [2]. The danger in a 1-second tick is that a) a massive change like this is hard to do [3] and b) it would likely increase volatility. A stylized fact of dynamical systems is that continuous feedback reduces volatility, whereas discrete step sizes increase it - witness how many numerical ODE solvers can blow up even while the underlying ODE is stable. [1] https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYIVNiUNcqfrAHHp4GoCA https://www.google.com/finance?q=NYSE%3AMS&fstype=ii&ei=bVYI... [2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr... [3] Bloomberg, Excel and other calculators contain mathematical errors (e.g., "weekends are sometimes treated as a business day for the purpose of interest accrual") which cannot be fixed because the change would be too disruptive.

guiomie 12y ago

I believe the exchanges have no interest in "solving" HFT since they make a good amount of dinero around it. IEX has made a business out of 1 second delay (700ms actually).

kasey_junk 12y ago
IEX has made a business out of being a dark pool explicitly designed for buy side hedge funds to be able to avoid market forces. The 700ms delay is the least of those features & is more of a marketing gimic.
minimax 12y ago
The IEX order entry delay is 350 microseconds (one way). Considerably less than even a millisecond.
- guiomie 12y ago
  My bad. It does say micro second on wikipedia, and I used the wrong unit abbreviation.
yummyfajitas 12y ago
HFTs nearly all provide liquidity rather than take it, which means that the exchange pays them to trade. You are simply wrong - the exchange loses money on most HFTs. https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_... http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 Ask yourself: why would the exchanges pay market makers to provide liquidity?
- crdoconnor 12y ago
  HFTs provide far more liquidity than is ever needed during normal periods and during periods of market distress (when liquidity is sorely needed) they suddenly and sharply withdraw that liquidity from the market.

bluecalm 12y ago

>>Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets? There are several arguments against it: 1)liquidity is good(1), more liquidity is better; why artificially limit liquidity, just let people provide as much as needed at as low price as market dictates; 2)Options are good(2), limiting liquidity increases prize of certain options (as issuer needs liquidity to offer options and the less liquidity there is the more expensive issuing those becomes, the effect might be small between 1s and 0s but it's still there) 3)Certain types of arbitrage would be less efficient. Arbitrage is good(3). (1)-the concept of liquidity is that when you have some goods you want to sell, you don't need to invest time/effort/money to sell it; that in turns frees your time to do productive stuff; the effect is obvious in situations like retail stores buying from manufacturer (so manufacturer don't need to do advertising, building stores etc. themselves so they have more resources to actually produce goods); the effect doesn't disappear magically at 1 second scale, more liquidity (faster, cheaper) is always better for overall productivity. (2)-options allow certain ventures which normally would be too high variance (forgive the gambling term) to pursue; they are form of insurance; reducing risk is almost always good but it costs to provide; the lower the prize, the better; (3)-arbitrage is good because the prices of goods/stocks become close to true value; we want that, we also want to pay for that as little as possible; the more effective the arbitrage the better, why stop at 1 second, when you can have cheaper/better ? This is not the whole story but those points are clear benefits of HFT. Liquidity is cheaper today than it ever was. Spreads are the lowest as well. Some people who used to make bank charging ridiculous spreads are now not making bank - this again is great. The arms race argument is that resources go into something counter-productive (like stockpiling nukes) instead into something productive. In case of HFT resources (at least some of the time) go into something desirable. It is a race but it is a race to improve desirable things (liquidity, arbitrage). You rarely hear argument about "arm race" in situations like that. It's usually called progress. Usually we applaud progress in situations where service provides needs to compete to offer the best/cheapest product. In case of HFT this point is often somehow overlooked.

dalore 12y ago
How does 1 second ticks stop liquidity and arbitrage? It just stops the faster connections wins. HFT aren't really adding liquidity since they only buy when they can sell straight away. So there was already a liquid purchase there. Arbitrage, if something is cheaper elsewhere, the 1 second tick will still bring the price into parity.

cynicalkane 12y ago

HFT gives me a minor amount of hope for our regulatory environment: the forces and popular opinion of Big Finance all oppose it, but regulators continue to allow it. The short answer is that HFT is like Wal-Mart: it's trendy and cool to complain about it, but in terms of providing better and faster inventory to ordinary customers, it works better than everything that came before. Except Wal-Mart is hated for being (allegedly) bad for poor workers, electronic trading's victims have primarily been the Wall Street old boys' club. Why the public is convinced this is a bad thing is beyond me.

harryh 12y ago
This is what really sucks about that Michael Lewis book. He could have told a great story to the public about how everything they had been told was wrong and that the HFT nerds (just like the baseball nerds) had used technology to make the world a better place. He has the talent to do this so well. But he fucked up and bought the story the buy side scammers were selling him hook, line, and sinker. It's such a bummer.
- conistonwater 12y ago
  Some stories are hard to tell, and even harder to sell.
  - harryh 12y ago
    Of course. I do think there is a great story to tell and sell here though. Matt Levine took a stab at explaining what that story could look like: http://www.bloombergview.com/articles/2014-03-31/michael-lewis-doesn-t-like-high-frequency-traders http://www.bloombergview.com/articles/2014-03-31/michael-lew...