Comment by supernova87a | Hacker News Reader

Comment by supernova87a | Hacker News Reader

While I read the report, here is a question I would love to know more about:

Many of these quant/algorithmic trading firms are exploiting market inefficiencies at the millisecond (microsecond??) level. To the point that no human person is participating on the same timescale, yet every "real person's" trade gets just a little bit shaved off by some algorithm able to take advantage of it.

What would be so bad about putting in human-sized time intervals as the minimum trading frequency? Like, buyers and sellers can only be cleared on a 1.0 second frequency, or even 0.1 second frequency. So that the millions of times-per-second arms race is nullified.

Are these algorithmic trades serving some public good? Why not have the SEC / exchanges put in this delay for everyone's benefit, and not have these firms make $ off everyone?

Or is that not actually the main market inefficiency happening / being questioned here, and the bigger loss is bulk movements driven by algorithms over hours/days, not milliseconds?

The root premise of your argument is faulty: because humans can't trade as fast as computers then humans must be getting stiffed on price. Why would that be?

First off when you enter an order it's probably being routed by an algorithm trying to get you the best price.

Second, if you do slow things down the way you propose, I don't see how it still won't be a speed arms race to be the first to get involved in the trade.

Speed is good. If you want to disincentive anything it should probably be excessive quoting.

Speed is good for what?

Characteristics of a company being a sound investment change in the order of days, not sub-second.

> Speed is good for what?

Getting an up to date price? When I go to market to trade, I want the best price available right now. Not one from 5 minutes ago.

But we're not discussing on the scale of minutes, we're discussing sub-second intervals that aren't even perceptible to humans.

This whole argument seems to boil down to "I don't understand why anyone would want to trade more often than X, therefore nobody should". What's the difference between 5 minutes and any other arbitrary time period, other than hand-wavey notions about "perception"?

I'm still not sure what problem removing my ability to cross the spread whenever I like is meant to be solving.

Flip it around, what economic problem does enabling you to trade more often than once per day (say) solve?

Trading more frequently reduces uncertainty (it's harder to predict 24 hours out vs. 1 minute out)and uncertainty equates to risk which means trading only once per day could increase the cost of capital.

You're basically asking "What economic benefit does a free market bring?" at this point.

It's easy to list the benefits of free markets, I don't think it's easy to do the same for sub-second regulated markets vs 1 second regulated markets.

> I'm still not sure what problem removing my ability to cross the spread whenever I like is meant to be solving.

What problem does it solve? Why should we have so many expert programmers and mathematicians spending their time competing in a 0-sum game that could simply run a bit slower and produce the same societal value?

You need to walk through your assumptions about how the algos are “shaving” off humans.

So what is algorithmic trading doing that's undesirable?

IEX does something like this WRT a minimum delay. Tom Scott has a video on it:

https://www.youtube.com/watch?v=d8BcCLLX4N4

It’s not human scale though. It’s “big market participants computers scale”.

Market participants run the gamut from seasoned rational professionals to knee-jerk reactive amateurs. Professionals are the ones who are willing to take the other side during short term movements for long term profits. This softens the blow and improves markets for everybody. One thing that is left out of these discussions is that many of the market inefficiencies we're talking about are relatively uninformed orders trying to buy/sell at any price, which the professionals are racing against each other to trade with. In many cases, they're literally paying the brokerages for these orders. If modeling helped you be right 60% of the time, you would want to flip the coin as often possible.

If a market did as you suggested, then there would simply be no orders for 0.99999 seconds and then a huge flood of orders at 0.000001 seconds before execution happens.

It gets a little complicated: do you want to continuously display market data and only clear trades once a second, effectively having a visible two-sided auction once a second? Or should it not be visible? (In which case you're no longer giving market data to all market participants, something they'd rather see)?

There are a couple of large firms that make 5-6 figures a day from arbitraging the closing cross. I'm sure they'd love to run their strategies all day; whether they would make more money than HFTs make now is anybody's guess.

I'm talking about all bids and asks being aggregated in the given window, and matched/executed at the end of it at once.

That would result in what was described above. You are taking unnecessary risk by committing to place an order at some point in the future. You might not be so sure a second from now.

Not if they couldn’t be processed in that time.

It is an interesting thought experiment though.. quantize time as well as price. You could exaggerate to one trade per day for the thought experiment. Now this would be on human scale so there is a lot of information that would build up (same when markets are closed). Between that and no time quantization like now, there are probably a few different positions (like electron orbitals) where positives and negatives vary quite a bit. Maybe one of them is better than the current system. Maybe not.

But.... Why?

What problem is this solving?

Seems like a lot of faff to get people worse prices.

A market maker tries to keep market neutral, but obviously that's impossible to do continuously. So they try to limit their exposure by being hedged all the time. The simplest hedge is obviously to hedge a stock against itself and thus not hold any inventory, but that is often impossible. A different way of hedging would be to hedge against correlated stocks based on a model you have.

For example, a market maker could see stock A and B be quoted at a certain price, and because they have some correlation with stock C, the market maker can quote stock C based on the price of A and B; knowing if they get filled on their quote with C, that they would be fast enough to get a hedge in A and B. Conversely, if quotes for A or B move, they know they can be fast enough to adjust their quote for C.

If markets did not trade continuously, there would be no (soft) guarantee to the market maker that if they got filled on C that the quotes for A and B would still be there, and thus you would see less liquidity in all stocks because of this.

Reply on news.ycombinator.com