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Comment by nickles | Hacker News Reader

Adding to this, HFT is a product of rule 612 of Reg NMS (the sub-penny rule). Markets are not allowed to show quotes in increments of less than $0.01 for most names. Since traders cannot compete on price, they have been forced to compete exclusively on speed.

The impact of such regulation was tested by the SEC recently with the 'tick size' program. Instead of reducing the minimum increment, some names saw it increased to $0.05. The hope was to increase liquidity while decreasing volatility in these names. In fact, those names experienced decreased liquidity with no decrease in volatility.

HFT is a result of regulation.

[0] https://www.sec.gov/divisions/marketreg/subpenny612faq.htm

[1] https://www.benzinga.com/general/education/18/04/11517027/th...

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On the other hand, the Intercontinental Exchange reduced the tick size for sterling interest rate futures towards the end of 2018, and the result was ... decreased liquidity! And resulting increased volatility.

I'm not sure anyone knows for sure why this happened, but the best theory i've heard is that the reduction in tick size reduced the expected profits of market makers, because they are collecting less spread on every contract they turn around, while not affecting their potential losses, because external factors which cause the market to jump three basis points will still cause it to jump three basis points. Halved regular profits divided by constant occasional losses equals no longer worth bothering with.

Or there was adverse selection: only kooky traders go into kooky trading rules.

you have some firms that know how to quote a product and can make enough money doing it to be worthwhile. They've done a lot of research and implemented systems to do that.

Change the rules on them for arbitrary reasons, the firms that were there leave. At least long enough to build new systems and trading strategies. Who replaces them, anyone? Why?

Increase the tick size, liquidity drops. Decrease the tick size, liquidity drops. The moral there is know why you are changing the rules in the market, how you are doing it and the implementation details and side effects that will result in getting the result you want or just don't do it. This could be better is garbage, know it is. Change is not good for its own sake if you want people to quote.

Without having read the regulation, why don't institutional investor just make a private market place where they can trade for sub-penny values?

Usually it boils down to consolidation of liquidity. For the same reason there are well over 20 ATS venues but only a few are successful, ultimately new venues have difficulty naturally drawing resting order flow.

Market fragmentation aside, adding more price levels to set orders to disaggregates liquidity in the book, usually resulting in lower execution quantity (which increases your overall transaction costs if you’re trying to space trades out).

What’s the minimum lag for a packet to reach around the world?

Multiply x2 and add an extra 10%.

Make that the minimum order placement tick duration.

There would be 1 single global price and no arbitrage between markets possible.

Now we just need the teleport

What about order cancels - would you similarly limit those?

Yes, the ability to cancel an order now vs 1 second from now is not that meaningful. Or as the general public is concerned ‘If you’re directly placing orders on the stock market you can ware your big boy paints.’

How is the packet traveling? Through undersea fiber? Through Starlink? Through the Earth by neutrinos?

I imagine that no one with any clout is petitioning for a more equal platform.

Orders are filled in the order that they arrive to the exchange (if there's more than one order at the same price). A global mis-pricing would still be subject to a race to exploit it - whoever submits first gets the fill, even if it happens in the future (in the next tick).

What you're proposing is turning continuous trading into a fast series of auctions, like what happens for every ticker on every exchange at the opening. This would have the disadvantage of no clear bid/ask - how can you be sure that the parties do not withdraw their offers before the next tick? And surely you must allow for offer withdrawals.

Why? It’s just like a clocked bus; you leave enough time for the levels to propagate along the transmission line and settle before closing the register gates.

All orders are placed at the previously known tick price and later orders will occur at the price declared on the next tick.

Of course no trader should access the “ghost price” before it is announced on the tick.

Propagation delays remain limited to local data centers and in any case it’s about globally known prices.

Where’s the arbitrage here?

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