4 ms·

>>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 i

>>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.
- kasey_junk 12y ago
  "How does 1 second ticks stop liquidity and arbitrage? It just stops the faster connections wins." No it doesn't. Let's suppose in your 1 second time tick you have more people attempting to buy at a price than sell at the same price? Who gets to buy and who doesn't? If it is FIFO then the speed advantage is still there. If it isn't FIFO it can be applied to non 1 second ticks as well. "HFT aren't really adding liquidity since they only buy when they can sell straight away." This is a completely untrue statement. Lots and lots of HFT hold inventory. Their inventory periods can range from seconds to minutes to weeks. The impact is that by being fast market makers can reduce some of their risk, which means that they can price more aggressively. If they can't reduce that risk via speed, they will reduce it in other ways, namely pricing less aggressively. This will increase price spreads and decrease liquidity.
conistonwater 12y ago
I think none of these arguments are very good against the idea of one-auction-a-second. 1) Liquidity is good, but remember who it is for. Uninformed traders, who want possession of the asset itself, will not care about a one-second delay because one second is too small an amount of time in human terms. Being able to trade a fraction of a second earlier is of no benefit. Being able to trade quickly on human timescales is the great benefit of algorithmic trading. Informed traders, such as market makers, even market-making algorithms, also shouldn't care about a one-second delay. Their contribution to the market is the price. If you are a very good market maker, and you can quote prices better than anyone else in the market, your prices will be the better ones anyway, regardless of how the market is structured. And the profits are the market's rewards for quoting good prices, not trading quickly. I would say the general idea is that liquidity providers and liquidity consumers compete, above all, on the price, and a one-second delay does nothing to hurt their incentives. 2) Again, I think it's quite obvious that on human timescales, on which actual economic decisions are made, there is no benefit to information arriving just a fraction earlier than it would otherwise. If you think of a market's purpose as revealing the price of an asset, it really shouldn't matter if the price is revealed 1ms earlier. What matters is that it is revealed at all, and revealed correctly with as many market participants as possible. 3) Because arbitrage becomes better when it contributes information to the market, not when it contributes information to the market 1ms earlier than another arbitrageur. I think your points are completely valid arguments for algorithmic trading. Algorithms providing market participants with better prices than humans are indeed better for everyone. But for high-frequency trading, with the emphasis on high-frequency, I don't think this is very convincing.
- bluecalm 12y ago
  >>. Being able to trade a fraction of a second earlier is of no benefit. Being able to trade quickly on human timescales is the great benefit of algorithmic trading. Informed traders, such as market makers, even market-making algorithms, also shouldn't care about a one-second delay. I think the other poster countered it well: >>The impact is that by being fast market makers can reduce some of their risk, which means that they can price more aggressively. If they can't reduce that risk via speed, they will reduce it in other ways, namely pricing less aggressively. This will increase price spreads and decrease liquidity. Human investors may not care about getting stuff 1ms faster but they should care about getting the stuff cheaper (or selling it for better price). >>Again, I think it's quite obvious that on human timescales, on which actual economic decisions are made, there is no benefit to information arriving just a fraction earlier than it would otherwise. Well, yeah, but again more stuff happens in one second than in one milisecond. It means there is more risk of more bad things happening. If there is possibility of more bad things happening the liquidity providers need to price liquidity higher to mitigate that new risk.

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.

kasey_junk 12y ago
"How does 1 second ticks stop liquidity and arbitrage? It just stops the faster connections wins." No it doesn't. Let's suppose in your 1 second time tick you have more people attempting to buy at a price than sell at the same price? Who gets to buy and who doesn't? If it is FIFO then the speed advantage is still there. If it isn't FIFO it can be applied to non 1 second ticks as well. "HFT aren't really adding liquidity since they only buy when they can sell straight away." This is a completely untrue statement. Lots and lots of HFT hold inventory. Their inventory periods can range from seconds to minutes to weeks. The impact is that by being fast market makers can reduce some of their risk, which means that they can price more aggressively. If they can't reduce that risk via speed, they will reduce it in other ways, namely pricing less aggressively. This will increase price spreads and decrease liquidity.

conistonwater 12y ago

I think none of these arguments are very good against the idea of one-auction-a-second. 1) Liquidity is good, but remember who it is for. Uninformed traders, who want possession of the asset itself, will not care about a one-second delay because one second is too small an amount of time in human terms. Being able to trade a fraction of a second earlier is of no benefit. Being able to trade quickly on human timescales is the great benefit of algorithmic trading. Informed traders, such as market makers, even market-making algorithms, also shouldn't care about a one-second delay. Their contribution to the market is the price. If you are a very good market maker, and you can quote prices better than anyone else in the market, your prices will be the better ones anyway, regardless of how the market is structured. And the profits are the market's rewards for quoting good prices, not trading quickly. I would say the general idea is that liquidity providers and liquidity consumers compete, above all, on the price, and a one-second delay does nothing to hurt their incentives. 2) Again, I think it's quite obvious that on human timescales, on which actual economic decisions are made, there is no benefit to information arriving just a fraction earlier than it would otherwise. If you think of a market's purpose as revealing the price of an asset, it really shouldn't matter if the price is revealed 1ms earlier. What matters is that it is revealed at all, and revealed correctly with as many market participants as possible. 3) Because arbitrage becomes better when it contributes information to the market, not when it contributes information to the market 1ms earlier than another arbitrageur. I think your points are completely valid arguments for algorithmic trading. Algorithms providing market participants with better prices than humans are indeed better for everyone. But for high-frequency trading, with the emphasis on high-frequency, I don't think this is very convincing.

bluecalm 12y ago
>>. Being able to trade a fraction of a second earlier is of no benefit. Being able to trade quickly on human timescales is the great benefit of algorithmic trading. Informed traders, such as market makers, even market-making algorithms, also shouldn't care about a one-second delay. I think the other poster countered it well: >>The impact is that by being fast market makers can reduce some of their risk, which means that they can price more aggressively. If they can't reduce that risk via speed, they will reduce it in other ways, namely pricing less aggressively. This will increase price spreads and decrease liquidity. Human investors may not care about getting stuff 1ms faster but they should care about getting the stuff cheaper (or selling it for better price). >>Again, I think it's quite obvious that on human timescales, on which actual economic decisions are made, there is no benefit to information arriving just a fraction earlier than it would otherwise. Well, yeah, but again more stuff happens in one second than in one milisecond. It means there is more risk of more bad things happening. If there is possibility of more bad things happening the liquidity providers need to price liquidity higher to mitigate that new risk.