What is the benefit of trading over ms resolutions. What problem is it solving?
Wouldn't trade be more efficient if it were lock stepped - say one trade per hour (per day?): you agree your trade and the exchange processes it on the hour.
What would be lost that benefits the pseudo-capitalism of these systems by having such a regime. How would this negatively impact production.
This part is actually a good thing. That said, I remain gobstopped that HFT is such a whipping boy in a world where no one responsible for the 2008 crash has been prosecuted or jailed.
The incident here seems to either be a clocking artifact or an excellent exploit of a momentary inefficiency in the market - just the sort of thing traders spend their careers on hunting down and exploiting - so why... so... serious???
There are in fact places where the exchange processes trades once per hour. They are called "Call markets". Their disadvantage is trades only take place once per hour.
>What is the benefit of trading over ms resolutions. What problem is it solving?
The problem it's solving is that people want to do it. Exchanges on which they can't are outcompeted by exchanges on which they can.
>Wouldn't trade be more efficient if it were lock stepped - say one trade per hour (per day?):
No.
>you agree your trade and the exchange processes it on the hour.
You "agree" your trade outside the exchange? What do you think an exchange is?
>What would be lost that benefits the pseudo-capitalism of these systems by having such a regime. How would this negatively impact production.
Spreads would get wider, i.e. more investor cash would get creamed off by middlemen, leaving less for the productive companies it was actually invested in.
>The problem it's solving is that people want to do it. //
As a generality I'd say that's false. Why buy in to a system that makes a tiny proportion of the populous vastly wealthy only because those people already are wealthy.
>You "agree" your trade outside the exchange? //
No, hence the conjunction. Perhaps "you issue a bid or offer" would have been better?
>Spreads would get wider //
OK, can you give a reason why that happens and why it leaves more with middlemen. At the moment a change in price so transient as to pass in milliseconds gets exploited to extract value from the system. In essence surely a greater spread means more to lose from selling quickly, that would appear to tend to stabilise.
Presumably the middle-men here are primarily market-makers.
To this layman it appears that traders currently extract value by reacting fastest to the rapid variations. That the value extracted far exceeds the original notion of guaranteeing trades in order to provide liquidity. Slow the variations and there are less opportunities to extract capital. Again this seems like it would tend to money being invested for longer term growth.
>As a generality I'd say that's false. Why buy in to a system
Because it gives you a better price. There are two sides to any trade; people go to the HFTs because their prices are better than anyone else's. If they weren't providing value, no-one else would trade with them.
> that makes a tiny proportion of the populous vastly wealthy only because those people already are wealthy.
HFT has greatly democratized market-making; in the old days stockbroking was an old-boy's network, virtually impossible for new participants to enter. Nowadays, three or four blokes with computers and one investor can start a new trading firm, and many of the biggest HFT players started that way.
>OK, can you give a reason why that happens and why it leaves more with middlemen
Because there's a higher risk. If I offer to buy microsoft for $50 but that offer has to stay out there for an hour, and news of a lawsuit comes out 20 minutes later, I'm going to lose lots of money. So the middlemen need to be able to bear that risk, they need much bigger capital reserves, and they can't afford to offer the penny spreads we see nowadays (because they need to make a greater profit to offer the same return on their bigger capital reserve).
> At the moment a change in price so transient as to pass in milliseconds gets exploited to extract value from the system.
Where's the value being "extracted" from? Certainly not from a fundamentals trader, who's getting the best possible price with the smallest possible spread (sadly, regulations require shares to be sold in increments of $0.01 and no smaller, so there's always $0.005/share to be made on every trade, which by modern standards is absolutely huge - and is why the HFT guys are willing to spend so much on low latency to maximize their chances of getting that $0.005/share. But the fundamentals trader always pays exactly $0.005/share; the HFTs are just fighting among themselves for who gets it).
>there's always $0.005/share to be made on every trade //
I [clearly] don't know enough to know if you're exactly right, but lower the latency and increase the trades and there you have it. Aren't bids and offers listed in pips (like $1.4032).
As I see it production, processing, administration, etc. are the only value inputs. When a 400ms glitch extracts something of the order 1e5 USD the value that money represents comes from those inputs. Yes liquidity is an administrative input but the way the system is set up trades appear to extract far greater amounts of money than their value to society; of course that money comes from other investors, but money is not value, the value the money ineffectively represents is brought to the system by those said inputs.
The problem appears to be that those in a position to rectify the aberration are too busy getting rich off it to care.
Thanks for your input(!) and education.
As an aside, do you [or anyone] know of something along the lines of a (FOSS) toy stock market program, something that allows one to model a market futz with parameters on trades (like changing minimum stock increments, or fixing time periods) and see the effects graphically. Like an ecological modelling program I suppose.
>lower the latency and increase the trades and there you have it
It is true that lowering the latency and more to the point narrowing the spreads increases trade volume, which I kind of glossed over, but again if you lower your margins and sell more of your product you're not extracting value but creating it. Fundamentals traders are (hopefully) buying and selling shares for good reason; helping them do it quicker and more cheaply is a good thing.
>Aren't bids and offers listed in pips (like $1.4032)
AIUI there's an exception for low-value shares, but most are required to be sold in increments of $0.01. (Of course that only applies to stocks traded on public exchanges, which is by no means all or even most HFT activity)
>As I see it production, processing, administration, etc. are the only value inputs. When a 400ms glitch extracts something of the order 1e5 USD the value that money represents comes from those inputs. Yes liquidity is an administrative input but the way the system is set up trades appear to extract far greater amounts of money than their value to society; of course that money comes from other investors, but money is not value, the value the money ineffectively represents is brought to the system by those said inputs.
You're right that there's a kind of "tragedy of the commons" going on; because there's that massive $0.005/share to be made and free competition on latency to be the company to get it, the competing companies naturally push harder and harder until they're all spending $0.004999/share on FPGA programming and the smartest employees they can find to get that $0.005. But it is at least kind of circumscribed; it's that fixed (ish) quantity of money getting wasted, nothing more.
>The problem appears to be that those in a position to rectify the aberration are too busy getting rich off it to care.
Maybe. I've seen elsewhere in these comments that large institutions are now trading directly with HFT players like GETCO and Knight, because they can offer better prices (narrower spreads - less than $0.01) there than they can publicly. These guys are now doing their own trade crossing, effectively acting as a private exchange - and competition between these private exchanges will make the spreads narrower still, and reduce the rents the market makers get. Of course, there are all the downsides of a private exchange - without a public order book it's a shark pool in the same way as the bond market.
Wouldn't trade be more efficient if it were lock stepped - say one trade per hour (per day?): you agree your trade and the exchange processes it on the hour.
What would be lost that benefits the pseudo-capitalism of these systems by having such a regime. How would this negatively impact production.