Donald MacKenzie on high-frequency trading

If you want to get rid of the speed element (I'm not sure it's a problem) you should explicitly allow people to pay for priority. The easiest way to do this would be to allow for extremely small fractions of price. So instead of having to pay for faster lasers I could just change my pricing structure to tack on .00001 on to the price.

1) When opening a "new tick", release data about trades in last tick, and start accepting new orders. Information about orders submitted to this tick is kept secret. Allow setting order price to practically arbitrary accuracy. 2) After tick closes, match orders in _random order_. That is, it should not matter at all on at which point in time inside this tick order arrived 3) repeat

Allowing arbitrary accuracy would help turn the competition from speed or stuffing the order book with huge number of orders to "spoof" the random matching, towards competition of just providing lower spread. I understand that it would still advantageous to hold submitting trades until very end of the tick, to take into account as much outside information (other markets, etc.) as possible. To counter this, maybe the exact length of the tick could be randomized also. What do you think?

Primarily because regulatory capture has, until now, overruled all attempts to reign it in. The banks and hedge funds engaged in this activity wield vast amounts of political power.

>Naively, couldn't all the craziness about HFT be resolved by enforcing a 1-second tick on the markets?

Not really. That just changes the game from "who can trade a picosecond before you?" to "who can trade a picosecond before the tick?".

An almost microscopic tax on transactions would prevent it, though while having a minimal impact on all other trading activity.

There are several arguments against it:

1)liquidity is good(1), more liquidity is better; why artificially limit liquidity, just let people provide as much as needed at as low price as market dictates;

2)Options are good(2), limiting liquidity increases prize of certain options (as issuer needs liquidity to offer options and the less liquidity there is the more expensive issuing those becomes, the effect might be small between 1s and 0s but it's still there)

3)Certain types of arbitrage would be less efficient. Arbitrage is good(3).

(1)-the concept of liquidity is that when you have some goods you want to sell, you don't need to invest time/effort/money to sell it; that in turns frees your time to do productive stuff; the effect is obvious in situations like retail stores buying from manufacturer (so manufacturer don't need to do advertising, building stores etc. themselves so they have more resources to actually produce goods); the effect doesn't disappear magically at 1 second scale, more liquidity (faster, cheaper) is always better for overall productivity.

(2)-options allow certain ventures which normally would be too high variance (forgive the gambling term) to pursue; they are form of insurance; reducing risk is almost always good but it costs to provide; the lower the prize, the better;

(3)-arbitrage is good because the prices of goods/stocks become close to true value; we want that, we also want to pay for that as little as possible; the more effective the arbitrage the better, why stop at 1 second, when you can have cheaper/better ?

This is not the whole story but those points are clear benefits of HFT. Liquidity is cheaper today than it ever was. Spreads are the lowest as well. Some people who used to make bank charging ridiculous spreads are now not making bank - this again is great.

The arms race argument is that resources go into something counter-productive (like stockpiling nukes) instead into something productive. In case of HFT resources (at least some of the time) go into something desirable. It is a race but it is a race to improve desirable things (liquidity, arbitrage). You rarely hear argument about "arm race" in situations like that. It's usually called progress. Usually we applaud progress in situations where service provides needs to compete to offer the best/cheapest product. In case of HFT this point is often somehow overlooked.

The short answer is that HFT is like Wal-Mart: it's trendy and cool to complain about it, but in terms of providing better and faster inventory to ordinary customers, it works better than everything that came before.

Except Wal-Mart is hated for being (allegedly) bad for poor workers, electronic trading's victims have primarily been the Wall Street old boys' club. Why the public is convinced this is a bad thing is beyond me.

You say that like that's a good thing.

I know that a lot of rubbish has been written about HFT and algorithmic trading, but it's sad that no one seems to be able to write about its merits without starting a flame war.

In trading, a quant's job is to outsmart or outspeed the other bank's team. They invest considerable brain power, effort and money into producing incremental improvements that are quickly rendered meaningless by the work of the team in the building across the street.

Another prime example is advertising, a zero-sum game where competing brands fight to undo other brands' brainwashing efforts and replace it with their own brainwashing. A waste of the time and energy of million of humans.

Some more ideas on the subject: http://www.sphere-engineering.com/blog/15-hour-work-week.htm...

Just be glad that some people's brains are bent on stuff of benefit to you, and concentrate, if you like, on what of general benefit you can do with your own brain.

1) there isn't that much money in HFT. It has an ever decreasing number of players working for an ever decreasing amount of profit. Other areas of finance such as hedge funds, traditional investment banks, and derivatives creation are much bigger and have just as many "smart" people working in them. Don't get me started on advertising...

2) HFT doesn't turn time into money. It buys & sells risk in the form of liquidity. One way that it does this more efficiently is by being able to get in and out of positions fast.

HN, predictably, has a huge bias towards the capital raising/allocation side of the financial markets, but this is not why most participants are involved. Hedging risk is another huge (probably bigger) reason the markets exist. HFT allow that risk to be hedged more cheaply and more predictably so they provide value to the rest of the market.