3 ms·

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, w

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.
- conistonwater 12y ago
  Fair enough, I think I just disagree with you on how much new information is created in a second that needs to be priced into the market.
  - harryh 12y ago
    But do you agree that automating market making has lead to lower spreads and thus lowered the cost of trading?
    - conistonwater 12y ago
      Yes, I agree. Was that not clear? If not, I expressed myself poorly.
      - harryh 12y ago
        Ah cool. It's much more important to focus on these reduced costs than to focus on the timescales involved in HFT. You are right to say that humans don't care about millisecond timescales but they do very much care about price. Only the computers care about those timescales but it's by fighting it out there that they can give you the best price.
  - bluecalm 12y ago
    Well, it might not be much. Maybe even at some point it really is a race to the bottom kind of situation but why make judgement about it ? If ISPs compete offering bigger and bigger bandwidth and faster and faster ping then it becomes pointless at some point again as only thing new competitor achieves is taking place of the incumbent without contributing significantly to what customers get. 100GB/sec or 1TB/sec, who cares. 1 second tick is similar to 100GB cap - supposedly there is no point at making the technology more efficient any more. Your argument comes down to: "The cost of providing new technology is higher than gains customer get and that is achieved by putting previous provider of the services out of business - hence waste". It might be true or it might not. We just usually don't care much because that is one of the situations where free market/competition does well in practice. Those technological arm races have other benefits as well, you never know what other uses the technology is going to have or what kinds of scientific advancement it stimulates. One day you may have 35% faster ping from Tokyo to New York because instead of optic fibers the connection will use some of technology mentioned in the article.

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.

conistonwater 12y ago
Fair enough, I think I just disagree with you on how much new information is created in a second that needs to be priced into the market.
- harryh 12y ago
  But do you agree that automating market making has lead to lower spreads and thus lowered the cost of trading?
  - conistonwater 12y ago
    Yes, I agree. Was that not clear? If not, I expressed myself poorly.
    - harryh 12y ago
      Ah cool. It's much more important to focus on these reduced costs than to focus on the timescales involved in HFT. You are right to say that humans don't care about millisecond timescales but they do very much care about price. Only the computers care about those timescales but it's by fighting it out there that they can give you the best price.
- bluecalm 12y ago
  Well, it might not be much. Maybe even at some point it really is a race to the bottom kind of situation but why make judgement about it ? If ISPs compete offering bigger and bigger bandwidth and faster and faster ping then it becomes pointless at some point again as only thing new competitor achieves is taking place of the incumbent without contributing significantly to what customers get. 100GB/sec or 1TB/sec, who cares. 1 second tick is similar to 100GB cap - supposedly there is no point at making the technology more efficient any more. Your argument comes down to: "The cost of providing new technology is higher than gains customer get and that is achieved by putting previous provider of the services out of business - hence waste". It might be true or it might not. We just usually don't care much because that is one of the situations where free market/competition does well in practice. Those technological arm races have other benefits as well, you never know what other uses the technology is going to have or what kinds of scientific advancement it stimulates. One day you may have 35% faster ping from Tokyo to New York because instead of optic fibers the connection will use some of technology mentioned in the article.