5 ms·

"When buy and sell orders come into an exchange, they are first flashed to those paying to see them for 30 milliseconds — 0.03 seconds — before they are availab

by quant18 17y ago

"When buy and sell orders come into an exchange, they are first flashed to those paying to see them for 30 milliseconds — 0.03 seconds — before they are available to everyone else." One thing I don't understand about "flash trading", and what I've never seen an explanation of in the media: How does this interact with price-time priority? In a regular old auto-matching system, if the spread is two ticks wide and a buyer sends an order to lift best offer (instead of just improving best bid): 1. If you had a sell order at best offer in the front of the queue the time the buy came in, you're matched, and it doesn't matter if you try to cancel your sell a nanosecond later. 2. If you had no sell order, it doesn't matter if you improve the sell price a nanosecond later --- you're not matched. So does "flash trading" change either of these? Or is it just a fancy name for "getting market data real fast" --- similar to what you'd get by colocation, but artificially enforced (e.g. they delay everyone else's data by 30ms so the "flashers" can see it first)? (edit - formatting and grammar)

Devilboy 17y ago
I found this article useful: http://www.nytimes.com/2009/07/24/business/24trading.html?_r=2 http://www.nytimes.com/2009/07/24/business/24trading.html?_r... It has a timeline diagram which explains it well.
- quant18 17y ago
  Thanks. So the exchange really are messing with price-time priority in exchange for cash? Wow ... But then why would any non-flasher ever place a single order on these exchanges? Couldn't a boycott could solve this problem without any legislation --- they could just go to an alternative venue which wasn't selling them out in exchange for more fees? --- Appendix: Bear with me while I think out loud so anyone can point out mistakes I'm making. Time n-1, Order #0: Some seller posts an offer of size N > 5000 at $21.00. (It has to be $21.00, otherwise Order #2 would have nothing to buy at that price). Time n, Order #1: Mutual fund sends buy 5000 "at market" (i.e. fill me at any price from here to the moon). Time n+1, Order #2: Would-be flasher sends buy N at $21.00. Time n+2, Order #3: Would-be flasher sends sell 5000 at $21.01 (and prays that no other flasher beats him to it). Time n+3: Repeat from time n-1. Under normal price-time priority, #1 matches #0, #2 matches #0 and becomes best bid, #3 doesn't match anything, and your new market is $21.00 / .01. The total traded volume is N. (The would-be flasher is now long N - 5000 and has to trade out at a loss of fees + stamp duty, so the first time around the total traded volume is 2N - 1, but that doesn't happen again: he either stops doing this shit or goes out of business). With "flash trading", #2 matches #0 (despite #1 having time priority) and #3 matches #1 (despite not even being in the market at the time #1 arrived). The total traded volume is N + 5000. The exchange earns some extra fees, the flasher gets the arbitrage profits, the mutual fund gets screwed, and the sellers (#0) don't care either way because they were willing to trade at $21.00 all along. Weird.
  - frig 17y ago
    Yeah, we're getting ever closer to the era in which: - you step out to home depot to buy a $20 hammer - when you get there "The Flash" (of dc comics fame) figures out you're looking to buy a hammer and buys all the $20 hammers - he leaves a post-it note saying "if you want a hammer meet me in aisle 7" - you get there and he offers to sell you a $20 hammer for $21 - either you buy it or you don't; once you've made your decision he returns either (N-1) or (N) hammers back to the store (30 day return policy and all that) - if you head over to lowe's instead well he is "The Flash" Not an exact metaphor for "flash trading" (as sketched it's riskless) but it's imho a relevant thought experiment. At the individual level the winners and losers are pretty obvious. At the systemic level it's unclear any actual efficiency is gained; differentiating between actual "efficiency gains" and "red queen" scenarios is tricky.
  - gaius 17y ago
    Because the truth is that this is business and all the people who aren't in on the flash would be if they could afford to be/had the expertise in-house.

by quant18 17y ago

Devilboy 17y ago

I found this article useful: http://www.nytimes.com/2009/07/24/business/24trading.html?_r=2 http://www.nytimes.com/2009/07/24/business/24trading.html?_r... It has a timeline diagram which explains it well.

quant18 17y ago
Thanks. So the exchange really are messing with price-time priority in exchange for cash? Wow ... But then why would any non-flasher ever place a single order on these exchanges? Couldn't a boycott could solve this problem without any legislation --- they could just go to an alternative venue which wasn't selling them out in exchange for more fees? --- Appendix: Bear with me while I think out loud so anyone can point out mistakes I'm making. Time n-1, Order #0: Some seller posts an offer of size N > 5000 at $21.00. (It has to be $21.00, otherwise Order #2 would have nothing to buy at that price). Time n, Order #1: Mutual fund sends buy 5000 "at market" (i.e. fill me at any price from here to the moon). Time n+1, Order #2: Would-be flasher sends buy N at $21.00. Time n+2, Order #3: Would-be flasher sends sell 5000 at $21.01 (and prays that no other flasher beats him to it). Time n+3: Repeat from time n-1. Under normal price-time priority, #1 matches #0, #2 matches #0 and becomes best bid, #3 doesn't match anything, and your new market is $21.00 / .01. The total traded volume is N. (The would-be flasher is now long N - 5000 and has to trade out at a loss of fees + stamp duty, so the first time around the total traded volume is 2N - 1, but that doesn't happen again: he either stops doing this shit or goes out of business). With "flash trading", #2 matches #0 (despite #1 having time priority) and #3 matches #1 (despite not even being in the market at the time #1 arrived). The total traded volume is N + 5000. The exchange earns some extra fees, the flasher gets the arbitrage profits, the mutual fund gets screwed, and the sellers (#0) don't care either way because they were willing to trade at $21.00 all along. Weird.
- frig 17y ago
  Yeah, we're getting ever closer to the era in which: - you step out to home depot to buy a $20 hammer - when you get there "The Flash" (of dc comics fame) figures out you're looking to buy a hammer and buys all the $20 hammers - he leaves a post-it note saying "if you want a hammer meet me in aisle 7" - you get there and he offers to sell you a $20 hammer for $21 - either you buy it or you don't; once you've made your decision he returns either (N-1) or (N) hammers back to the store (30 day return policy and all that) - if you head over to lowe's instead well he is "The Flash" Not an exact metaphor for "flash trading" (as sketched it's riskless) but it's imho a relevant thought experiment. At the individual level the winners and losers are pretty obvious. At the systemic level it's unclear any actual efficiency is gained; differentiating between actual "efficiency gains" and "red queen" scenarios is tricky.
- gaius 17y ago
  Because the truth is that this is business and all the people who aren't in on the flash would be if they could afford to be/had the expertise in-house.