> pointless expenditure on an ultimately meaningless arms race
What about price discovery is pointless? Would you prefer that prices update only once a day? Once a week? Once a month? Realtime pricing of securities and derivatives is critical for an efficiently functioning economy.
> if we imposed reasonable limits on the time required to hold an equity in order for a trade to be legally recognized
This would damage the ability of market makers to function, ultimately driving up the cost of offering pensions, 401k plans, retail investing, low fee ETFs, etc. If these companies are willing to spend their money competing for the ability to offer you a better, faster price, why is this upsetting?
If you're opposed to the emphasis on latency in equity markets, focus on rule 612 of Reg NMS, which prohibits showing more competitive prices.
> What about price discovery is pointless? Would you prefer that prices update only once a day? Once a week? Once a month? Realtime pricing of securities and derivatives is critical for an efficiently functioning economy.
Pretty much everything at sub-second resolution is pointless.
I'd like to hear a coherent argument how realtime or even sub-second pricing of securities and derivatives is critical for an efficiently functioning economy, yet the largest markets in the world are closed 2/3rd of the day.
The fact that most markets are closed on all weekends plus over 10 holidays per year suggests that even an update once per day wouldn't make much of a difference.
This. A million times this. All possible arguments for price discovery are totally invalidated by regular market closures.
Conversely, if sub-second resolution is somehow "a good", then by extension sub-millisecond price discovery is "even better". There are some insane people that state this kind of gibberish with a straight face.
If millisecond are good, then surely microseconds are even better! Next... nanosecond resolution price discovery for the uuuuuultimate liquidity.
>Conversely, if sub-second resolution is somehow "a good", then by extension sub-millisecond price discovery is "even better". There are some insane people that state this kind of gibberish with a straight face.
if sub-second Internet latency is somehow "a good", then by extension sub-millisecond Internet latency is "even better". There are some insane people that state this kind of gibberish with a straight face.
If millisecond are good, then surely microseconds are even better! Next... nanosecond resolution Internet latency for the uuuuuultimate speed of information.
If what you're sampling and responding to is noise, then yes, it's pointless.
If what you're sampling and responding to is noise, and the responses themselves generate self-perpetuating expanding feedbacks, it's worse than useless: it's actively harmful.
> This. A million times this. All possible arguments for price discovery are totally invalidated by regular market closures.
As has been pointed out elsewhere, the really big markets are OTC.
> If millisecond are good, then surely microseconds are even better! Next... nanosecond resolution price discovery for the uuuuuultimate liquidity.
If I go to market to get a price, I'd quite like that price "now", not at some arbitrary point in the future. Increasing the resolution reduces the amount of time I have to wait.
> Pretty much everything at sub-second resolution is pointless.
Should your credit card network only allow transactions once a minute? Price data comes from transactions (trades) as they occur. There’s more utility derived from a market where people can transact on demand.
> yet the largest markets in the world are closed 2/3rd of the day
Not correct. Equity markets are far from the largest in the world, yet it’s possible to trade 24 hours a day, 5 days a week (actually thanks to HFT). Currency markets operate around the clock. Rates markets operate ~22-23 hours a day, 5 days a week.
> The fact that most markets are closed on all weekends plus over 10 holidays per year
Markets exist for their participants. Corporations looking to hedge commodities exposure, trade currencies, manage interest rate risk, or buy/sell stock have employees who work during business hours. That doesn’t diminish the need for real-time pricing. And most holidays are domestic, so major markets still operate internationally.
> I don’t think I ever had to do two transactions in a minute.
If the network only clears once a minute, you need to wait at least a minute for each person ahead of you in line at the store. Alternatively, you need to be willing to pay more to cut them in line.
Wait, isn't the correct analogy for the stock market that there is an (almost) infinite amount of registers, but each of them can only clear a customer at the first second of each minute?
This is where the analogy certainly gets stretched. The network and the registers are really both the exchange here.
Equity trading only happens at a small number of venues (inclusive of OTC, dark pools, and internalizers probably not more than in the hundreds, potentially low thousands). These would be the registers. In order to buy a stock, either you choose to ‘cut the line’ by paying the price someone tells you they are willing to sell at, or you wait for someone to sell at the price you announce you’re willing to pay. These transactions are processed serially (albeit quickly) at the exchange.
Allowing trades only once a minute (or some other period) is akin to allowing the credit card network to clear once a minute. Trades cannot occur more frequently, so the ability to enter and exit positions on demand is diminished. Obviously someone who wants to trade immediately for one reason or another is harmed by having to wait. Additionally, everyone (even those not trading) is harmed by not having up to date valuations for the positions they hold.
Sorry, conflating frequency of price discovery for efficient investment allocation with payments (as you here) or with internet speed or aircraft control systems (as someone else above) is really disingenuous.
Being closed on weekends is just fine for the market (unlike credit cards, the internet, or aircraft control systems).
> I'd like to hear a coherent argument how realtime or even sub-second pricing of securities and derivatives
I won't touch equities, but surely it's obvious why derivatives have to be priced quickly? When the underlying moves, you have to re-price the derivative, otherwise you're giving away money!
Well, anything that limits the complexity of derivatives is probably a good thing!
Obligatory caveat: I know derivatives aren’t evil, and are very useful to the world, but we all know what happens when they get so complex that almost nobody knows what they are.
Pretty much everything at sub-second resolution is pointless.
Some people think so, but the truth is you will simply shift the competition from “as fast as possible” to “within as few picoseconds after exactly one second” or whatever the limit is.
Ad long as you can model the latency statistically people will still try to play the game. It will be much riskier of course, and I'm not sure why that would be a better outcome.
Most of these efforts are aimed at taking advantage of lags in information flow, often within the very trading systems on which the trades are occurring. They are exploits, not essential market-making. Noise, not signal. What's the right timeframe? Something based on the time it takes for humans to reason about a price. Not a day, but certainly not milliseconds, either.
The social value or reducing the price dissemination lag from a microsecond to 110 ns is zero. Hence why the billions of resources going into it are a greater waste than even bitcoin.
I don't want to get caught up in arguing what is noise in the mathematical sense. I think the parent is refering to the fact that the arbitrage traders are not adding any real value by making these trades this fast. The market would adjust in miliseconds. Who really wants to let some guy who built a 825 mile cable be a rent seeker on every trade for all eternity? https://www.businessinsider.com/chicago-stock-exchange-respo...
The "free choice" argument is a charade: the only people with the "freedom" (ie, wealth) to win that race are "people" like Goldman Sachs. On the whole, it's just another legal mechanism for pumping money from the poor to the wealthy. Modern markets could not exist without regulation, which by definition limits freedoms. We're just talking about a sensible regulation that eliminates a pointless misdirection of resources, not unlike laws against gambling.
A lot of HTF shops are comparatively tiny companies (in the order of hundreds or less employees). Large hedge funds and investment banks are relatively late players to the game.
Nanosecond pricing updates might be a little more than anybody needs. Maybe if the exchange cleared once every second, that would serve anyone's purposes. Remember the market is ultimately about allocating capital between businesses and governments, and for economic purposes it doesn't need to run any faster than they can.
> Nanosecond pricing updates might be a little more than anybody needs.
This statement reveals that you do not understand what is happening when a transaction occurs. The price is simply the market clearing price. It is not as if updates are being published, simply that the correct price is being discovered more rapidly.
If you think of the price erroneously as something that has been published, then of course there is nothing beneficial about speeding up the transaction turnaround time.
But if you think of each transaction (and every participant willing to transact for close to the clearing price) as a vote that the price being transacted is close to accurate, then the more participants and volume available amount to significantly more information than was previously available.
Imagine if trades were available only once per hour. Consider the kind of spread would a market making firm have to utilize to avoid losing money!
Speeding up the market adds additional efficiency and reduces inventory risk for market making firms, increasing information and liquidity for all.
> as a vote that the price being transacted is close to accurate
These votes are not an indication of accuracy though are they? they are gambles about future price discovery. As in they don't care if they think the trade is worth $5 if they think it might go up before crashing to what they really think it is worth.
I'm not very knowledgable about HFT so I'm just trying to reason about how it works. I guess it's the concept that without the higher frequency everything must be more unstable which is hard to grasp. It reads like we have to make it easier for these firms to make more money so everyone else can enjoy the 3rd order effects of the process.
> Nanosecond pricing updates might be a little more than anybody needs
That may be the case, but the 'problem' is caused because market makers aren't legally allowed to offer better prices than they might otherwise desire. It doesn't seem prudent to layer flawed regulation on top of flawed regulation when there's a simpler solution.
> Remember the market is ultimately about allocating capital between businesses and governments
Equity markets have many purposes. Companies indeed raise money by issuing equity (IPOs and secondaries), and there are cases where governments participate for monetary purposes (BoJ & SNB's equity purchases). But markets also allow:
* employees to sell equity compensation they've received whenever they want
* retail investors to diversify their asset allocations
* sovereign wealth funds, pension funds, endowments, and other real money sources return on their portfolios
* for hedging financial risks
* companies to return money to shareholders in the form of buy backs
> for economic purposes it doesn't need to run any faster than they can
All the previously mentioned functions happen all the time, and the marks (prices) generated from this activity helps inform many other economic functions. Everything from central bank policy to insurance pricing depends on well functioning markets. In light of this, why should we make things less efficient by slowing things down and driving the cost up?
>Would you prefer that prices update only once a day?
Obviously you are being hyperbolic, but some people have proposed literally laying excess cable to slow down the speed of automatic trades, which can be highly volatile. That's not damaging market makers at all. It's smoothing out the supply and demand to prevent micro-crashes and other arbitrage.
What about price discovery is pointless? Would you prefer that prices update only once a day? Once a week? Once a month? Realtime pricing of securities and derivatives is critical for an efficiently functioning economy.
> if we imposed reasonable limits on the time required to hold an equity in order for a trade to be legally recognized
This would damage the ability of market makers to function, ultimately driving up the cost of offering pensions, 401k plans, retail investing, low fee ETFs, etc. If these companies are willing to spend their money competing for the ability to offer you a better, faster price, why is this upsetting?
If you're opposed to the emphasis on latency in equity markets, focus on rule 612 of Reg NMS, which prohibits showing more competitive prices.