Banning Some HFT Strategies Helped This Market Grow: Chart
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The whole aspect of making updates faster, transactions faster will always lead to those who can afford it looking for an edge in speed and in most cases - getting it, aided or unaided.
But with such dysnimic speed any misdirection in price rise or fall can and has been in the past exhausebated and when you look at the impact again, wonder why so fast.
I can appreciete the fater exchanges operate the mroe transacitons and brokers just love commision, more transactions more commision and it was and always is a crux in any fiscal market.
Indeed the Llyods crash was due to many brokers factoring (watering down the pools of money in effect) risks (groups of insurance poiceys) so many times that when there was a big claim (asbestos) then the whole thing crashed as the pools of money to cover the insurance were eaten away so much by all this over factoring of the risks about with brokers taking a slice everytime it got passed about and reinsurance became a rererererereinsurance style affair that with so much commision taken out it was a financial timebomb awaiting to happen. Again can look more recently at mortgages and how companies polled those together as they do with insurance and reinsurance in much the same way. Though more case of hiding potentual asbestos risks in with less risker mortgages and the rest we all remember.
So can see why I do question the need for faster and faster stock markets when, too me daily would work and indeed even hourly. Would eliminate HFT and indeed make the whole market more stable and focused upon the companies and not what todays market become based upon somebody famous doing or saying something on twitter more then actual results.
https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...
If you do reduce the tick size you'll need to make some changes to internalization to reduce the toxicity of lit venues.
Some advantages:
1. All assets will be as liquid as they are now. Still got opportunity to buy/sell 8 * 60 = 480 times per day.
2. Most of the HFT industry will be redundant. Instead of allocating super smart people on made up problem, they can solve more important social problems (e.g. robotics, curing cancer, aging, space exploration, high growth tech companies).
3. Less day trading, encourage long term perspective.
What models? Increasing the amount of risk a market maker must bear will widen the quoted spreads not narrow them since that increased risk needs to be priced in.
Since batch auctions use single-price clearing, market makers can post bids and asks without fear of being sniped (so its less risk, not more). And since you can't snipe, they have to compete on price rather than investing in faster connections, resulting in narrower spreads.
1. Putting "high growth tech companies" (we know you mean startups) in the "important social problem" bucket, especially in the same group as aging, cancer, space exploration, is tenuous at best.
2. Until any of the above pay half a million a year plus huge bonus potential, I seriously doubt anyone going into HFT would give them more than a passing glance.
1. Not all startups are equal, but quite a few will create some lasting value.
2. Unsure if most of this career alternatives will ever give that sort of gains. The question is where the gains come from? Inefficiencies in trading strategies of your retirement fund? Maybe those inefficiencies are always present if humans type orders? Maybe we should design stock market with human first approach, not HFT exploitable?
But is the reduction of HFT qua HFT really the goal? Making a market low-frequency will by definition reduce/eliminate HFT as a strategy but you will still have a lot of trading activity done by well capitalized companies using lots of expensive equipment. They will just use different strategies.
I have not heard of similar comp levels in the aging/cancer/rocket space. My suspicion is that this is the result of cultural differences where management takes a much bigger piece of the pie. I would be happy to change fields once this is fixed.
1) Speed is still critically important as you have every incentive to wait until the very last microsecond before the end of the 1 minute window to submit any orders.
2) What do you do if there are more buy orders than sell orders at a given price for a given batch? Who's orders get filled?
So it would still be first come first serve. Or am I missing someting?
That encourage you to submit transactions earlier in time slot (as you get more chance to complete them).
Still there is some HFT strategies possible, but window of opportunity will be by an order of magnitude or two smaller.
This is the problem NOT that one trader gets his or her orders in before the other. At least that is how I understand the problem.
If you don't understand that, then your understanding of the problem is hopelessly wrong.
What we are talking about is specifically removing the advantages of HFT (if one consider it a problem), not removing the fact that someone can get and order in before someone else.
Another way to look at it is that the less the market resembles reality (through regulations, such as larger defined processing intervals) the more it can be taken advantage of. Rules often provide sharp edges where there was previously a continuous curve, and sharp edges are where you can game the system.
As far as I understand HFT, it's not that it's better at predicting the market but rather it's better at taking advantage of micro volatility?
Or am I completely wrong?
For a very simplistic example of this, if you look at some type of transaction that has extra regulatory requirement/burden that kick in on certain criteria (for example, over a certain price), you should see some interesting behavior when looking at transactions immediately above and below this price level. You'll also likely find interesting solutions to circumvent that rule to capitalize on the reduced competition that allows (to my understanding, this is a semi-accurate high level overview of a part of the derivative mess we found ourselves in a few years back).
> As far as I understand HFT, it's not that it's better at predicting the market but rather it's better at taking advantage of micro volatility?
My understanding is that you are correct, but in taking advantage of the volatility, they make it a micro level volatility, and both provide a more accurate value of a stock (by reducing the spread), and at a shorter time interval (which together I guess is liquidity).
Of course that's all armchair theorizing on my part (in case it came across as overly authoritative or knowledgeable). I'm not a trader, don't work in the industry, and am not an economist. This is just the working model in my mind based on the economics as I see them and my knowledge of the markets, which admittedly is mostly from discussion here...
It's advantage was that it could do it at a speed humans couldn't do.
While there is no specific speed at which we make trades we do mostly get our information from the market. If the frequency of updates go down I would guess so would the randomnes of when we make our bets. The frequency of the market affects the randomness of the order.
And yes I am really just a Layman although I did do this for Nasdaq :) http://tv.adobe.com/watch/customer-stories-air/nasdaq-market...
Different HFT firms are competing against each other on various bases (one if which is speed) to provide you, a human, the best service.
What I was trying to say was that humans simply can't do HFT and that the advantage of that is only possible if you have millisecond updates. If you remove that then you remove the advantages of HFT and humans would be able to compete.
Whether that is good or bad for the market is another discussion.
I don't think making the market quantized (upon reviewing the Nanex story from last week[1], that's apparently the term) makes the problem of people not being able to compete in this small aspect of the market go away, it will just change its nature. Everyone will make trades immediately before and after the point at which it coalesces, otherwise you are leaking information to the market that might be used against you. This requires fast machines, and we're back where be began, with an arms race to see who can submit the most orders in the shortest time right before that point, and who can analyze the orders fastest immediately after (which is specifically the point I was originally making regarding. "sharp edges" and "continuous lines", since the quantized market is essentially a step function).
The original claim was that if we did by the minutes updated then there would be issues with more buyers than sellers. This was the original claim that was being used as a reason for why a minute frequency would be problematic.
I haven't seen any real explanation for why that is problematic for the reasons discussed in this thread.
Less frequent updates means less frequent available information to trade on, means less advantage for the HFT algos who won't have the advantage of being able to trade in the milliseconds anyoore, something humans can't do.
If one thinks HFT is a problem then thats a perfectly fine solution which isn't from what I can se giving problems of more buyers than sellers.
If one doesn't think it's a problem then sure we don't need to compete with them but at least to my understanding the premise of this whole discussion was that someone suggested slowing down the frequency and the answer was that this would be problematic.
I wasn't responding to that. My original reply to fr0sty was somewhat of a tangent. I can see where we might have been having two separate arguments with each without knowing it because of that.
> Less frequent updates means less frequent available information to trade on, means less advantage for the HFT algos who won't have the advantage of being able to trade in the milliseconds anyoore, something humans can't do.
The advantage of HFT isn't necessarily the frequency, which is just a way to increase number of trades, but speed, which is what allows them to capitalize on information before the competition. Changing how often they trade will not affect the real reason they do so, which is to capitalize on market information before the competition. That race still exists.
> If one thinks HFT is a problem then thats a perfectly fine solution which isn't from what I can se giving problems of more buyers than sellers.
My stance is that even if you think it's a problem, I don't think it provides any sort of solution. They can still make trades much closer to the cut-off and much sooner after the market coalesces than any human, so humans are still unable to compete in that particular area.
> If one doesn't think it's a problem...
I'm not sure how I feel about them, but I don't see "humans competing" as a valid reason. HFT algorithms are humans competing, just at a meta level. Whether it comes down to mental ability to analyze markets and physical reflexes without HFT algos, or it comes down to intelligence of the design of the algorithms, it's still humans competing (we could have the same argument decades ago regarding humans filling out order sheets by pen and pencil and those trading through a terminal, the technology doesn't replace, it enables).
You take that away you take away the advantage of most HFT. I don't see how thats not part of the solution.
HFT algorithms are humans competing at a meta level which begs the question whether the value it provides is meta too. I.e. I have yet to see any benefit HFT brings to anyone but those who do HFT. It doesn't seem to help the market as far as I can see.
It's done as I said purely because it's possible with computers to trade there and it seems to be a privatized version of a tobin tax.
I think this is the fundamental difference in our points of view. I've outlined why I think the frequency is a red-herring, and the speed at which they can execute on information relative to other actors is the real item in question, changing the interval at which the orders are realized doesn't really affect if they are still handled on a first come first serve basis. If they aren't then HFT may be affected more adversely, but that may bring other adverse behavior that hasn't been accounted for.
You either aren't addressing this aspect of my argument at all, or I'm entirely missing it in your responses (which is entirely possible, mental context can affect interpretation quite a bit). I don't know how to continue without you either addressing that aspect of my argument, or pedantically pointing out where you already have so I don't miss it again, since at this point we're just saying the same thing to each other over and over. :/
Put another way. If there is no millisecond updates then there is no HFT trading. It vanishes completely. No one is having any issues with this new reality being first come first serve. So again your argument is attacking a strawman.
We know how the market looked like without HFT because we lived in a world without it. What consequences are you talking about?
It's also worth mentioning that the stock market stops every day and over the whole weekend so if reality was the key goal then it should always be open.
In other words we decide the frequency and as far as I understand HFT it provides no value because it's not reacting on outside information it's reacting on price volatility in the milliseconds which isn't really a reflection of anything much more than price fluctuation at the milliseconds.
Automated traders react to all kinds of different information not just prices. And even if it was just prices that would be enough because there are lots of different markets and you can't coordinate them all.
From Wikipedia:
"...Algorithmic trading, also called algo trading and blackbox trading, encompasses trading systems that are heavily reliant on complex mathematical formulas and high-speed, computer programs to determine trading strategies.[1][2] These strategies use electronic platforms to enter trading orders with an algorithm which executes pre-programmed trading instructions accounting for a variety of variables such as timing, price, and volume..."
The OP suggests making major alterations to the functioning of equity markets, without any evidence that he's done any research or even thought carefully about the costs and benefits involved. He suggests that the proposed changes are highly beneficial (we might even cure cancer!). How seriously are we supposed to take this sort of thing? Should we also welcome the kind of amateur mathematician who has a simple proof of Fermat's Last Theorem?
Personally, I think a bit of snark is warranted.
As others have mentioned, this structure does not negate the benefits of speed.
Someone else already asked what you would do if there are more buyers than sellers (or vice-versa) in auction. If you're going to allocate randomly instead of using time-priority this is equivalent to pro-rata allocation in expectation. There are already pro-rata markets in the US and elsewhere.
This structure does increase transaction costs because I am less willing to make a tight market if I have to hold risk for such a long period of time.
> Most of the HFT industry will be redundant. Instead of allocating super smart people on made up problem, they can solve more important social problems (e.g. robotics, curing cancer, aging, space exploration, high growth tech companies).
It seems to me that you are overestimating the profits generated by HFT and the number of people employed in this industry.
The above is just my probably incorrect opinion.
First of all, how do you only allow passive orders? If an order is marketable when it arrives at the exchange, then is it rejected?
Second, how does this resemble IEX's speed bump? I'm very confused.
[1] http://www.bloomberg.com/news/articles/2016-02-03/this-upsta...
The tie in to IEX is tenuous at best.
It quotes Doug Cifu, the head of the largest HFT firm in the world.
I don't know much about Aquis strategy for growing their exchange but if its anything like the aequitas exchange that has just opened in Canada then they get inflated numbers by begin the exchange off record where some banks get paid to report their large block trades.
Compounding with that, some studies say that trading itself causes most (2/3) of the volatility, so it is expected that µs-scale trading creates even more volatility.
Could you help me understand why this might be expected?