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Comment by jellicle | Hacker News Reader

Intervals of a few milliseconds? You could peg prices every few seconds, minutes, or hours. A trading interval of one trading session per hour would be fine. Put in all your offers to buy or sell, trading closes at 10:00:00 and then all the received trades are matched up and executed. Once per hour, once per minute, any interval works fine for the USEFUL purpose of the stock market (allocate capital). It just happens to kill off the non-useful purpose, gambling.

While you're at it, tax all stock purchases.

All HFT is front-running the market and should be banned.

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How many times does someone need to explain that enforcing fixed-interval ticks is a bad idea for people to stop bringing it up on HN?

In the current environment, you own shares of MidCap Inc. They release a really bad earnings report, the company looks like it'll just keep sliding for the next few months and you want out. You see what the price as of 5 seconds ago is is (5 seconds since you're only human), put yours in at just below that and 10 milliseconds later you've sold your stock. You got a fair price and you aren't stuck holding a bad stock.

In your proposed 1 hour ticks, you still own MidCap and they still release a bad earnings report. You still want out, but since trades execute once an hour you have no idea what the price is after this earnings report. You put in an ask at a slight loss (you don't care about the loss, you just want out), wait 45 minutes and... Fuck, everyone put their asks lower than yours. Half the book clears and everyone who didn't get their ask thinks "I really don't want to be holding onto this crap stock". You re-list at a 25% loss, because you really just want out and the average trade was a 15% loss anyway, and so does everyone else. You better hope the book gets completely cleared this time, or that stock is gonna hit the floor.

That's all not mentioning the fact that 1 hour ticks wont eliminate HFT and the desire for low-latency (who get's priority when there are 2 $33.55 bids on the book? The first one placed?). And half of HN will be grumbling about how the exchanges take all this profit when the bid/ask spread is negative.

Ah, 1 hour ticks. I like it. Imagine the spikes of traffic at the start of every hour. Just beautiful. That would result in the prompt upgrade from 40Gbps to something much faster. And finally all these pesky bugs in the routers and network cards will get sort out. Beautiful :)

Aren't all of those problems solvable?

1) Use ticks less than an hour. Say, one second. Or even one minute--however long it takes to settle an auction. You will quickly get a sense of the price. 2) If there are multiple bids on the books, randomize priority at the bid level. The goal is to remove HFT, not create a new HFT with more granular resolution.

Lowering the interval makes the effect less pronounced, but it's still there. When you have fixed intervals the order book will keep increasing in size until the trades execute on the 1 second interval or whatever it is, and the book will be larger than for our current instantaneous ticks. Larger book means wider spread, as basic game theory says when you have more participants you need a stronger hand to have the same odds, so if you want that trade to execute you put it way outside the last price. HFT firms narrow the spread and take the difference as profit, as they don't really care if 1 particular order executes so they play closer to the last price.

Randomizing the execution order makes the spread even wider, because now you need to beat everyone instead of just tying if you want to guarantee execution. And again, the HFT firms don't care if any particular order executes. Although randomizing the order would probably reduce the incentive to co-locate, but I'm guessing the larger firms would still want quicker access to the last price, just in case.

Also, in all of this I'm assuming no one outside of the exchange can view the actual book, just the last price. If you let people see the full book, as they can now, this is all a wash anyway as they'll just "trade" by placing and cancelling orders right up until the next tick.

If my orders get random priority I will just spray a bunch of smaller orders onto each level. Look at the Eurodollar markets. You get execution priority based on size there and traders just send massively oversized orders.

Why is the goal to remove HFT?

Your scenario trades efficiency for fairness. I don't see a problem with this in general.

Whoever started this theory that HFT would somehow be hurt by periodic auctions must be in the HFT industry. Because disparate auctions just make it more difficult for the myriad exchanges to maintain compliance with Reg NMS, and the fastest market makers will be the ones to make all the money arbing the auctions against one-another.

The purpose of the secondary markets is to transfer risk, not to allocate capital. That may be why people take such moral outrage at things like HFT when they're really just making the market more efficient. Nobody acts like 7-11 is an immoral part of the milk and bread market when they only hold inventory for a day, and nobody suggests that we don't really need 24/7 stores so everyone should just buy their bread direct from the manufacturer during a 5 minute window.

In any case, if you want to trade in a single price auction, you can do it right now. Every primary exchange has an opening and closing auction. People are already given the option to trade like that and prefer to trade in a continuous market. Why would that be?

I hope someone can correct me here if I'm wrong, but wasn't this the purpose of the Volcker Rule? Wasn't it designed to put a collar on HFT?

No. The primary purpose of Volcker was to stop prop trading at insured banks. Most HFT is done by smaller shops.

The rule already exists to ban it... any trade submitted without the intent to actually execute is illegal. HFT is based on creating and with drawing trades continously to discover the best price available. The rule is just not enforced. Regulatory capture is the problem, not lack of regulations.

Considering any low-latency firm worth talking about will be able to afford viewing the full order book (which apparently you can get for $750 a month http://www.nyxdata.com/arcabook) they don't need to create and withdraw trades constantly.

They will however do this on dark pools, as dark pools specifically don't publish the order book. But no common investor will be trading on a dark pool, so this professor wont be able to "cheat" (with as much scare quotes as possible, as AndrewBissel and others discussed) them out of $377k. I don't know the regulations for dark pools so I can't say if this behavior violates them or not, but I'd assume not as dark pools are typically set up to thwart HFT so they'd pounce on any opportunity to keep them out.

I would be delighted to get filled on every order I send. HFTs usually flicker quotes due to fast changes in their valuation model or software bugs combined with insufficient risk controls.

Smart HFTs actually try their best to avoid sending orders. It's incredibly expensive latency-wise compared to leaving your quotes alone and you give up queue position.

Why tax stock purchases? Or is this just anti-rich grumbling?

Unfortunately, there are various positive properties of a marketplace that are in tension. In this case, the fairness of price over time and the availability of the market.

Front running is when a broker purports to act as a fair middle-man between a trader and the market, but instead fraudulently manipulates the market to cause price degradation to the trader. It has nothing to do with HFT.

HFT is not gambling. Markets are predictable, in the same way that the value of wheat in November is predictable from the amount of rain in May. HFT simply extends the prediction process to short timescales.

Is front-running illegal because the broker owes a duty to their client or because we want people to feel markets are fair? There are clear cases where HFT algos disadvantage poorly placed orders (e.g. lazy portfolio manager rests a huge bid inside the spread, HFTs are likely to join or improve his quote and trade ahead of him) but isn't that just helping the markets move to the correct price more quickly? The lazy PM is hurt but another investor ends up getting a better price.

In any case it always strikes me as odd that the financial markets are the only place where untrained individuals decide to play head-to-head against pros and are then outraged when they lose. As long as access is fair and non-discriminatory I think that's all you can hope for.

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