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The high-frequency trading arms race: frequent batch auctions (2015)

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Re: The high-frequency trading arms race: frequent batch auctions (2015)

#81

Post by lmm »

smabie wrote: post #80
lmm wrote: post #78

Earlier quoted context omitted.

The main reason they compete on speed is because it's illegal to compete on price. Abolish the sub-penny rule and it'd go back to being boring market plumbing.

This isn't really a good take: many markets do not trade one tick wide in the first place and people are still competing on speed. Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat. Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how…

> many markets do not trade one tick wide in the first place and people are still competing on speed

True but not something that I find compelling. If you can only compete on price in penny increments, then you'd have to be hugely more confident to undercut a 1c spread with a 2c spread; if you could offer a 1.8c spread by taking a little more time over your calculations, that would change things.

> Delta neutral trading is a zero sum game and no matter what rules you put in place it will still be incredibly cut-throat.

I mean yes, to the extent that there's profit in it at all. But the profits have already been shrinking year-on-year. Plenty of mature industries like supermarkets are utterly cut-throat, but don't bother regular people.

> Moreover at this point speed is a commodity, if you're willing to shell out cash, you can get access to top tier infra right out of the gate. The real game is not how fast you are (though obviously that's important too), but how smart you can be while maintaining good tick-to-trade latency.

Well, it's the same thing, like the project management triangle - you can always trade quality for speed and vice versa, the hard part is when you want to improve both. But I do agree that at this point a lot more of it is known quantities and techniques.

> Trading has never been a vanilla/boring business and it likely never will be either.

My sense is that it's no longer where the best and the brightest go (and as I said before, profits are shrinking a lot). More and more of it is commodified. Which is what we should expect from any industry, honestly - at some point things are new and exciting and profitable, then they become mature and less so.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#82

Post by aserafini »

harryh wrote: post #35
aserafini wrote: post #24

Earlier quoted context omitted.

That was my initial thought as well: this would just become an arms race to submit your trade last? But maybe if the trades were priority queued it would negate that.

But maybe if the trades were priority queued it would negate that. If the trades are priority queued, then you have just recreated the speed "arms race" that this idea hopes to eliminate.

But if you submit your trade ‘first’ you miss out on any information that arrives afterwards.

Maybe it cancels out the advantage of being ‘first’? I am admittedly well outside my area of expertise.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#83

Post by ur-whale »

hcarlens wrote: post #9

This type of order book is actually quite common in Europe now! It provides an interesting alternative to central limit order books and dark pools. Around the introduction of MiFID II regulation in 2018, several exchange operators added these frequent auction books. Cboe's period auctions book is the biggest of these by volume: https://www.cboe.com/europe/equities/trading/periodic_auctio... In addition to Cboe, Turqu…

> sadly it's paywalled

Which mean most people here won't be able to read it.

What aren't uploading it to sci-hub or some other free access venue?

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#84

Post by fighterpilot »

akvadrako wrote: post #31
fighterpilot wrote: post #28

Earlier quoted context omitted.

Correct. I believe you need to randomize the auction time. This massively reduces the speed advantage. Without that speed is as important as ever. How does a priority queue work?

That just leads to the same question: is there proof its harder to game random batches?

Gameability is distinct to whether there is an advantage to low latency. A random batch auction will be gameable but not so much via speed. Not sure how a math proof would work for that though.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#85

Post by hcarlens »

ur-whale wrote: post #83
hcarlens wrote: post #9

This type of order book is actually quite common in Europe now! It provides an interesting alternative to central limit order books and dark pools. Around the introduction of MiFID II regulation in 2018, several exchange operators added these frequent auction books. Cboe's period auctions book is the biggest of these by volume: https://www.cboe.com/europe/equities/trading/periodic_auctio... In addition to Cboe, Turqu…

> sadly it's paywalled Which mean most people here won't be able to read it. What aren't uploading it to sci-hub or some other free access venue?

Yeah it's a shame. I don't own the IP, my previous employer does, and I think when they got it published in the journal of trading they had to agree to some level of exclusivity which meant it can't just be uploaded elsewhere.

I just linked to it in case someone here had a subscription.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#86

Post by twic »

jkhdigital wrote: post #65
twic wrote: post #51

If you're a market maker, you really, really want to be able to do low-latency trading in order to hedge fills before the market moves against you. If market makers can't do this, they will make worse markets - show less size and wider prices, or just get out of the game. How do you do this under continuous batch auctions? I have an underdeveloped idea that what we really need is limit order types with built-in hedgi…

Putting what amounts to trading bot logic into the orders themselves seems like a bad idea for scalability. Is all order logic visible to all market participants? If so, then everyone has to run their own local market logic resolver to determine actual liquidity. If not, then true market liquidity is now opaque.

If anyone else is faster than you, then true market liquidity is already opaque. Indeed, this is one of the criticisms of HFT - that the liquidity they present is "fake", "ghost", "phantom" liquidity, because it will be pulled at the slightest provocation.

Existing mechanisms which obscure liquidity are iceberg orders, market maker protection [1] [2] [3], and various kinds of non-displayed orders [4] [5] which i confess i am not very familiar with.

I think this illustrates that exchanges are sometimes willing to sacrifice a little transparency in order to encourage more liquidity provision. This is a fundamental axis of market design. At one end are classic lit exchanges, at the other end is OTC dealing, and there are all sorts of shades of grey in between. Which is most appropriate will depend on the specific balance of participants and activity in the market in question.

[1] https://www.eurex.com/ex-en/trade/market-making-and-liquidit... ("Risk protection for Market Makers")

[2] https://www.cmegroup.com/confluence/display/EPICSANDBOX/Mass...

[3] https://www.nasdaq.com/docs/market_maker_protection_model_-_...

[4] https://www.cboe.com/us/equities/trading/offerings/non_displ...

[5] https://iextrading.com/trading/order-types/

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#87

Post by dna_polymerase »

hcarlens wrote: post #85
ur-whale wrote: post #83

Earlier quoted context omitted.

> sadly it's paywalled Which mean most people here won't be able to read it. What aren't uploading it to sci-hub or some other free access venue?

Yeah it's a shame. I don't own the IP, my previous employer does, and I think when they got it published in the journal of trading they had to agree to some level of exclusivity which meant it can't just be uploaded elsewhere. I just linked to it in case someone here had a subscription.

https://sci-hub.se/10.3905/jot.2018.13.3.005

We need to take information, wherever it is stored, make our copies and share them with the world - Aaron Swartz

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#88

Post by usefulcat »

Kranar wrote: post #77
valkmit wrote: post #66

Earlier quoted context omitted.

It's kind of an open secret, but retail traders hopping onto meme stocks like DPZ and TSLA is, counterintuitively to an outsider, actually very profitable for HFTs and market makers. A good example might be - imagine you are a car dealership, so serving as a rough approximation of a market maker. What kind of entities do you want to trade against? Other car dealerships (informed counterparties), or your average subur…

I'll just chime in and say I believe you are misinformed and wrong on this issue. I can say definitively that my firm which engages in HFT and all the other quant/HFT firms I know of have decided to stay clear of the meme stocks, ie. GME, BB, AMC, and a few others and I am not aware of any open secret that HFT firms are sneakily taking advantage of this situation. Your statement that HFT firms think that retail trade…

Having worked in HFT for many years now, this absolutely rings true. I would add, backtesting a meme stock strategy sounds like an exercise in over fitting. There are so few previous examples to look at. And all for something that rarely happens, relative to how many stocks are out there and how many trading days there are in a year.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#89

Post by usefulcat »

jkhdigital wrote: post #65
twic wrote: post #51

If you're a market maker, you really, really want to be able to do low-latency trading in order to hedge fills before the market moves against you. If market makers can't do this, they will make worse markets - show less size and wider prices, or just get out of the game. How do you do this under continuous batch auctions? I have an underdeveloped idea that what we really need is limit order types with built-in hedgi…

Putting what amounts to trading bot logic into the orders themselves seems like a bad idea for scalability. Is all order logic visible to all market participants? If so, then everyone has to run their own local market logic resolver to determine actual liquidity. If not, then true market liquidity is now opaque.

The orders don’t have to be visible; invisible orders have been around for a long time.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#90

Post by HWR_14 »

harryh wrote: post #41
HWR_14 wrote: post #40

Earlier quoted context omitted.

How do HFTs add valuable liquidity to the market? Does the 500ns faster transaction time for a block of AMZN matter to literally anyone? Other than the two sides of the trade who lost some money to the HFT who MITM'd them.

When someone buys liquidity, they don't do so to close their order 500ns faster. They do it to ensure they can trade at the current market price because they don't want to take the risk that the market will move away from them while waiting for a counter-party to trade with. Those that are comfortable taking this risk can simply issue a LIMIT order instead of a MARKET order.

So your contention is that HFTs make prices more stable? That they somehow assume risk and that justifies their profits. How would that work? I thought HFTers only got involved in between two parties when they knew they could make a profit. That's why HFTs don't have days when they lose money.
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