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Comment by pasbesoin | Hacker News Reader

I'm going to say this again: Exchanges should be put on a stepped clock. I'd suggest a one minute interval. Orders pile up during that interval, and then they're processed in random order. If things start to go really, State-concerning hinky, then authorities "pull the plug" before the next interval is up.

Anything less, to my mind, serves point-shaving and profiteers, rather than real investment.

Then, all the "gearheads" can go back to doing useful science. And maybe getting paid decent wages and benefits for doing so.

/grump

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Hoped to find such a comment here, this is basically about mechanism design - how can we design an exchange that removes the additional profits such microscopically low latency generates, when the low latency itself isn't providing value, i.e. the low latency => profit phenomenon is an artifact of the rules of the exchange.

I appreciate your thoughts, but regarding your suggestion: random isn't well-defined. It can be random as in "randomly pick a participant, let it buy/sell as much of the stock as it asked, then pick another participant etc.". This encourages Sybil attacks - participants have an incentive to create other identities for themselves, and hope one of the identities will be picked "randomly". Another definition of "random" may be "randomly pick an order to buy/sell a single stock, execute it, repeat-until". This, I was told on an earlier HN thread, strongly encourages placing more orders than one wants, again in the hope of fooling the "random" part of the exchange. I was told this is actually what's happening currently in exchanges built this way.

I had a suggestion I tried to analyze (even as a possible idea for a mechanism design paper): What happens if "random" is defined as "your chance of getting picked (to be able to sell the stock) is proportional to the amount of this stock you own"? At least, we got rid of the incentive for Sybil attacks (and didn't create the opposite incentive, for conglomerates - separate entities don't have an incentive to present themselves as a single entity, then do the bookkeeping internally). But it's unclear what to do when there are more willing buyers than sellers. Any thoughts, anyone?

I have also wondered whether this whole thing is an artifact of quantization - what would happen if the price granularity was allowed to be as small as one wants?

(In case anyone's wondering, a friend I consulted told me this probably wouldn't fly as a paper - useful economic policy if I can solve that "more buyers" problem, but nothing scientifically novel).

p.s. Sorry for the long comment.

By the way, this is an awful, awful idea that you hear quite a lot. Think about what would happen. What incentive would a participant have for placing an order early in the one minute interval? If you can't cancel it, you're a sitting duck. And if you can't be executed now, why insert the order now? By doing so, you show your hand. You'd end up with a rolling one minute e-bay auction where everyone tries to insert at the last possible microsecond.

Why would it matter when people place the orders if there is no extra information to be gained during that time? If the orders placed are only revealed after they have taken effect, why bother waiting for the last moment?

YOu have just reinvented a 1 minute cross on a unlit platform...

Because of course "real investment" is saintly like the Dalai Lama, and is certainly not looking for a profit.

I take your point, and I didn't downvote you. From my perspective, there is an important difference between taking a position in / with respect to a product (or its organization) and taking a position for the position's sake.

Perhaps it is something of a continuum, not a strict either/or. If so, I find that currently we've gone too far towards the latter.

I'm also concerned that current constructs exhibit chaotic tendencies that put real people and essential systems at risk. I view stepped trading intervals as a potential damper to some of these negative and out-of-control tendencies.

Ultimately, I view investment as backing and furthering production. And I don't see how micro-second based investment appreciatively, substantially furthers this.

P.S. Admittedly, it has been an important factor in pushing computer and network systems development, which may well have had knock-on effects. E.g. is one substantially aiding the other, or the other way around: Trading versus CERN data processing and distribution?

My comment was a bit snippy. Not intended to be rude (but perhaps pointed).

I suppose I get concerned when I see forces applying moral judgment to investment techniques and timescales (as distinct from companies actions, where I think it's easier to judge - e.g. not wanting to invest in tobacco, for example).

The long term investor is not necessarily more moral than the short term investor, though he may be. But part of the long-term investor's confidence in his investment emerges from the fact that he can exit his investment if he judges that long term trends make it less valuable to hold it.

That liquidity is, in large part, created by the churn of short-term speculators operating in the zero-sum game of the short term. Spare no tears for the short term-speculators - they operate in a tough game, and the ones who actually thrive and stay around for the long haul do provide a valuable service - reduced trading costs, narrowed bid-ask spreads, and faster order execution as a commodity.

Similarly, products such as ETFs (held by millions of small investors and 401(k) accounts) owe their existence to the ability to rapidly rebalance portfolios in response to changing prices of the underlying products that the ETFs are trying to replicate. Prohibiting rapid trading eliminates the possibility of the various affordable products that track indexes, commodities, sectors, and so forth.

"real investors" do have an option of going to dark pools :)

Dark pools exist because these "real investors" you speak of are muppets. If you're a market maker out in the big bad world you are exposed to adverse selection risk - i.e. you're up against smarter, better informed or faster traders who hurt your profits. If you set up a dark pool, you can pick and choose your customers, and keep these people out. You can quote tighter in the dark pool than the wider market, so your customers think they're getting a great deal, but in reality they're only getting this deal because they are (collectively) great big juicy marks who you can make a fortune from.

This is why you see the big investment banks setting up dark pools, they can't compete in the technology race or with smaller more agile firms, so they retreat to these pools.

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