It's not clear to me that batching actually solves all our problems. It might be better, but it doesn't seem 100% clear cut.
But when the external information is released earlier in the window (which should be just as likely if random, and maybe even mandated for press releases to occur at the beginning of the window) the playing field between collocated HFT and smaller traders is much more level than the current situation.
But most information used in trading isn't from external sources, its from the order book itself. Collocated HFT with 1ms latency can read the book, calculate next move (let's say 20ms), and submit new order in 1 + 20 + 1 = 22ms. A trader with 100ms latency and the same system would take 220ms to respond.
This is where most of the HFT advantage comes from, they can see the order book and respond before it even arrives at your computer. With a batch auction everyone sees the previous results at the beginning of the window and has 1s to respond. Low latency is still desirable to allow for more processing, but its no longer overpowered.
edit: 1 sec was chosen completely arbitrarily, the best choice could be more or less, or even a random sized window.
"The London Stock Exchange’s Turquoise Midpoint Dark Pool has a service known as Uncross, which matches orders at the midpoint of the bid and offer with auctions held randomly every 5 to 10 seconds."
https://blogs.cfainstitute.org/marketintegrity/2014/11/10/ar...
Spoiler: No one will.
Or are they arguing that the government should step in and tell people how to trade?
No, there's no disadvantage for the human's 1-second-old stale order because batch auctions use uniform-price clearing (aka single-price clearing, all orders in a batch interval transact at the exact same clearing price).
[1] http://www.gamasutra.com/view/feature/131503/1500_archers_on...
Introduction and reasoning: http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...
Implementation details: http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...
Both interesting reads though. We actually implemented batch auctions as a way to set initial prices for our prediction markets at Inkling Markets (http://home.inklingmarkets.com/) based off these papers.
- their proposal seems to require either coordinated legal regimes & consistent global clocks or a monopoly exchange, both of which on the surface seem impossible.
- their matching algorithm both still has a time priority component as well as a random or pro rata component, which is problematic.
- finally, the main complaint seems to be with the profitability of the arb not decreasing, but isn't that a direct function of the legislated price floor imposed on the markets?
Further, there are already pro-rata matching engines, and they also have "high frequency shenanigans". In fact, they actually can encourage more gaming as you have to put in more quantity than you want, so you have to do something else to manage your risk.
> ... batch processing with uniform-price clearing eliminates mechanical arbitrage opportunities. To be clear, if only the local market utilizes batch processing with uniform-price clearing, and the external market utilizes conventional serial processing and discriminatory pricing, then there will still be arbitrage opportunities in the external market. That is, the fastest traders can still profit by propagating prices from the local market outward to the external market. But arbitrage opportunities in the other direction, from the external market into the local market, are eliminated.
I find this extremely difficult to believe, got any numbers to back it up? Surely the vast majority of the volume comes from market making activity...
Most of which is market making activity.