[amluto]

You’ve made a huge implicit assumption here: that efficient arbitrage requires low latency. It may well be that case that, right now, most of the arbitrage of the sort you’re discussing is done by HFT firms, but I see no reason at all to assume that a market in which latency is less relevant will not be efficiently arbitraged.

There are certainly human beings who manually arbitrage some markets even today, but that tends to be more complicated kinds of arbitrage. The only real connections between latency and trading strategy that I know of are:

Certain strategies don’t work if you aren’t the fastest kid on the block.

Certain strategies are too complicated to do if you are the fastest kid on the block. (For an example of the latter, you are unlikely to succeed in reading news reports, doing complex analyses, and executing trades based on your analyses in 100ns. No amount of money spent on top-of-the-line nVidia gear or tensor processing units is going to change this.)

[sippingjippers]

Hmm, this is true. Another way to think about it perhaps is that, I don't think any race can be avoided just by slowing things down somehow, the rules of the game are only slightly changed in that case, and perhaps not in a way that has any benefit to slower traders.

For example at IEX when they introduced their speed bump, it was to protect their so-called 'mid peg' hidden orders. What they found was that these orders were still the target of adverse selection because some HFT trader could submit speculative orders well in advance, by predicting price movements based on fast information from connectivity to the order books of other exchanges.

That PDF is an awesome read ( https://iextrading.com/docs/The%20Evolution%20of%20the%20Cru... ), but I think it speaks to a more general problem of trying to slow down. Even if auctions on all exchanges only occurred once every 10 seconds, there will still always be an advantage to whoever can aggregate information the fastest and use this to submit a best price at the latest possible moment to participate in the auction.

In my uninformed state, it doesn't seem possible to truly reverse this process, and I'm left wondering what problem would be solved by attempting to eliminate HFT from the markets

[amluto]

That's an interesting read. For what it's worth, I think that IEX's "speed bump" is somewhere between a publicity stunt and a way to circumvent the regulatory rules about NBBO. (I imagine that IEX is not allowed to implement the speed bump in software because they are not allowed to pretend they don't know about an NBBO update. But if they use intentionally slow hardware, then they genuinely don't know about the updates.)

The paper is a bit confusing:

> Suppose at a given point in time, the market has been stable for awhile (meaning the best bid and offer prices have not changed for several milliseconds), and trading venue V has an accurate, up-to-date view of the NBBO in that symbol as $10.00 by $10.02. So the resting buy order is pegged to the midpoint price of $10.01. Now, a seller comes along and trades with all of the buy interest at $10.00, changing the best available bid to $9.99. The midpoint of the NBBO is now $10.005, but this information does not arrive at trading venue V instantaneously. There is a small window of time in which venue V still believes the midpoint is$ 10.01, so if a matching sell order arrives at venue V during this window, it can trade with the resting buy order at$10.01. This is bad news for the initiator of the resting order, because the NBBO has already changed in their favor, and this execution at $10.01 goes against the spirit of what a midpoint pegged order is intended to accomplish.

Now I'm not a securities person and I don't really know the spirit of what the midpoint order is intended to accomplish. But if I were a serious trader and I had a buy order resting at $10.01, I would be rather annoyed at the beginning of this process -- a seller came and sold at $10.00, but my resting buy at $10.01 didn't match the seller. Similarly, the seller should be annoyed that they only got $10.00 and not $10.01.

(I assume this only obeys the NBBO rules themselves because IEX midpoint pegs are non-displayed, but I am not an expert here.)

There appears to be disagreement about what exactly a midpoint order is. Interactive Brokers says:

> A pegged-to-midpoint order provides a means for traders to seek a price at the midpoint of the National Best Bid and Offer (NBBO). The price automatically adjusts to peg the midpoint as the markets move, to remain aggressive. For a buy order, your bid is pegged to the NBBO midpoint and the order price adjusts automatically to continue to peg the midpoint if the market moves. The price only adjusts to be more aggressive. If the market moves in the opposite direction, the order will execute.

Which is rather different.

Personally, I find fancy order types to make the market unnecessarily complicated, and I also think that Reg NMS and the whole NBBO mechanism is well meaning but actually mostly makes the market worse.