To make shenangins more obvious, what if 1 minute were the maximum resolution that any trade could happen? Say, every order gets a random number of seconds between 0 and 60 added to it before it is executed. Or even longer. What would happen if everyone gets 10 minutes to digest any news?
This sounds like the type of regulation that people outside of an industry put on the industry with good intentions but really no idea what the consequences would be.
Consider a company who holds a press conference announcing something huge (either positive or negative). Anyone wanting to buy or sell in this tiny window pretty much gets shafted by such a system.
I think that's exactly the point. So the whole world gets to trade after they've digested the news, not the guy with the fastest computer or the shortest wire to the exchange.
And why exactly shouldn't the guy who's invested in the best hardware have an edge? Should perhaps we also mandate that all software engineers use exactly the same 2004-era Acer Pentium 4 laptop so that any difference in productivity is strictly due to programming skills?
This. The entire reason for having this market is to reward making better decisions about allocating society's resources, not the same decisions imperceptibly faster. The market's clearing system is flawed in ways that reward huge misinvestments in solving the wrong problem.
Didn't see anything about rewarding better decisions about allocating society's resources. I did see a lot about raising capital for corporations and for providing an indicator of the general mood of the economy though.
The stock market is effectively a giant casino for pros. If you're not one, you're just plain dumb if you try to play their game by their rules.
And of course, with the sort of thinking you're putting forth, we should obviously OUTLAW that 66 GH/s bitcoin hardware. It's so unfair to everyone else who can only afford a cluster of 8 AMD 7970s, no?
And the remedy for that is for the demographic who believes in "hot streaks" in casinos and professional athletics, who thinks the lottery is a good investment of their cash, and fashions themselves as homebrew "masters of the universe" to listen to Warren Buffet and invest in index funds rather than trying to outcook Bobby Flay in his own kitchen.
"And why exactly shouldn't the guy who's invested in the best hardware have an edge? Should perhaps we also mandate that all software engineers use exactly the same 2004-era Acer Pentium 4 laptop so that any difference in productivity is strictly due to programming skills?"
Apples and oranges. Should we also mandate that doctors only use scalpels?
Any analogy quickly becomes ridiculous as soon as you compare HFT to anything of actual use in this society.
You mean the people trying to shaft the other people would cancel each other out and the ACTUAL larger market trends would work themselves out over the long run?
Yes, I am admittedly absolutely naive to the inner workings of the market.
So what would happen in the press conference case? You would make your move based on the news knowing that sometime in the next 10 minutes it would be executed. No one else has any advantage so they can't necessarily get it done quicker. The value of short term moves is reduced, so everyone plays with a longer view.
There is one huge problem with this, which is that under no circumstances can you reward people for placing larger orders than they can actually execute. If you do, you encourage people to make large orders in the hope that only part of them will execute, which can have catastrophic consequences if for some reason the whole trade executes in some unexpected case.
Any form of lottery is vulnerable to this. If you clamp all the timestamps to ten minute intervals, then you need some arbitrary rule to decide which of the valid trades in some time window to execute. If you randomly choose a few, you encourage people to put in more orders than they can execute. If you satisfy them partially, you encourage people to put in larger orders than they can execute.
As a result, the only way to do this that encourages proper behavior is to have some arbitrary competitive rule in place. The easiest and most obvious such arbitrary rule is the fastest order wins. This might seem anti-competitive at first glance, because it keeps out the tiny investors who can't get enough capital to compete in this area. But really, it's not that bad because it only takes a few million dollars if that to get top-notch hardware in a Manhattan or Chicago datacenter. In addition, market-making is by-and-large a commodity service: the entire HFT community can only make money when the market is inefficient, and market-maker competition makes the market more efficient. The HFT world makes money off of market inefficiencies, which are capped by the size of the market and the amount of outside investment. It's a hyper-competitive world of arbitrary rules, in place to encourage a more efficient market for investors. So you don't want to do it yourself, and you don't want to regulate them because you want HFT to be a insane low-margin nightmare for the benefit of everyone else.
Interesting. Thanks for the detailed response. I guess I can always naively assert that traders would figure out how to manage that bit of risk (that more of their trades would execute than they really wanted) but your explanation makes sense. Fastest order wins and, yes, that is arbitrary. Imperfect, but it keeps the market relatively efficient.
I know very little about finance, so treat this as a genuine question: what would be wrong with preventing people from buying or selling in such a tiny window? What would be the downside?
Or perhaps to encourage more long-term thinking there is a rate limit to the number of trades you can execute. We could start slowly: 1 trade per second, perhaps.
