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For 1), I'd randomize with proportional unit (share) representation, and I'd certainly be open to rule-prioritized execution (e.g. most-favorable taker first) if it didn't lead to degenerate incetives. Smart market design can incentivize people to play at their best price. For example: locational marginal pricing in wholesale energy markets... 2) I agree that the real world is quantized, but I think that a settlement tock to the bidding tick could be used to reduce the value of proximity. IEX actually implemented general latency with long runs of fiber, which is a really elegant fix. They couldn't make the rest of the world latent, so it's something like 700 microseconds, enough to remove colocation advantages, but only enough to solve for New York. 3) As far as I know, HFT's like to play in limit order and derivative books. It's where practices like flashing and spoofing have come from. Market orders are fraught with peril, especially if you don't know the matching rules for the exchange. As far as tightening the spread and aiding price discovery, I don't think that those two things are the same. If a security has naturally low volume, responsive high frequency trading can effectively be predatory. 4) I agree that there is more to HFT than just speed, but I view high frequency temporal arbitrage as an unnecessary market feature that provides the illusion of liquidity right up until that liquidity would truly be useful (since robots get benched when things go strange). Granted, the temporal steps that I'm advocating here are a little provocative. The US could be solved in something like 200ms, and larger global markets, like currency exchange, are already fairly decentralized (though not as much as they used to be, as far as I know). Either way, I don't think that NASDAQ can assure global temporal coherence, especially without controlling the entire network. Given that, it makes sense to design robust systems that don't pivot into rare modalities in exceptional cases. Just pull clock slew off the board. |
2.) What problem does this solve? Proximity is freely available and relatively inexpensive. Barriers to entry for professional traders are much lower than the days of buying exchange seats. 10s of thousands a month sounds like a lot, but it's nothing compared to the costs of running a trading operation.
You could give every man, woman and child a rack at Nasdaq with a nanosecond trading system, and they wouldn't make any money. Proximity only matters to traders running latency sensitive strategies. These strategies have low margins per trade and can only profit through scale. Running them requires robust systems that take years to develop, capital, smart researchers, and data.
3.) Spoofing is illegal and people go to prison for it. HFT is just a catch all term for executing short term trading strategies with a computer. Most HFTs make their money through market making, arbitrage, stat arb, or some blend of those. All profitable trading can be cast as predatory, but that doesn't make it bad. Having accurate prices and more quotes in the market is a public good.
4.) So you believe it's good if S&P 500 futures go up 2%, nobody arbitrages the S&P 500 ETF, and John Smith comes to the exchange and sells his ETF shares 2% below their value? I'm guessing not.
Odds are you believe arbitrage and efficient pricing are important. If you believe that, then someone should do those trades, and they'll earn profit as a reward for correcting the price. Why shouldn't it be the person or machine who does it first and for the lowest possible margins?