[cma]

Every day markets shut down at 4pm except for very limited after hours trading. Every weekend down. 10+ days a year, down for market holidays.

We're talking on the order of zero liquidity for 30% of the days (weekends and market holidays) in a given year, and severely limited liquidity outside of market hours.

If liquidity was as important as we like to say, this just wouldn't be the case.

[kasey_junk]

I'm not sure I understand your argument. Let me see if I can restate it:

"If liquidity was really required at the millisecond level, market participants would not accept markets being down for holidays or weekends."

But that is not the point of the millisecond (or sub) resolution. The point is so that the people that provide the liquidity during operational hours can add as much information as they can into their pricing models, thereby requiring them to take on less risk with each bit of liquidity they provide. This less risk gets passed on as savings to the rest of the market participants in the form of smaller spreads. Any increase in that resolution increases the risk to the market makers, who will therefore need to increase the spread to compensate, making trading for everyone more expensive.

This would be true if the markets were only open 4 hours a week as well, though trends are towards more 24x5 (at least) trading, not less (and I think that is a good thing).

[cma]

I worked in technical risk management for a large market maker in the US. The latency arms race just drove things towards riskier and riskier practices in our systems.

Soft-realtime systems in C++ instead of safer garbage collected runtimes.

Parsing market data on FPGAs or Cell processors instead of in code written with emphasis on safety.

Distributed trading systems that couldn't afford the latency budget to pass everything through centralized risk management, and therefore not taking into account the entire order book before authorizing a trade. Instead a series of compromises and less optimal failsafes.

It also just lead to more expensive practices--communication between threads using spinlocks instead of the normal waking a waiting thread through a system call; basically converting the spreads we could capture into data center waste heat in order to beat out the next guy.

Artificially slowing things down a bit would have just reduced costs and increased safety for everyone.

[kasey_junk]

That is a bit of an orthogonal issue, but I would say that it doesn't show that the speed of HFT is a problem to the broader market. For instance as a market participant I largely do not care about the implementation of any given market makers risk configs. In fact, even with all the nasty bits in HFT, it is loads better than the system it replaced. There is an open question about if it can be made even better.

I'd also suggest that your experience (many of which I share) do not necessarily mean that speed is making things riskier, only that your centralized risk management was not as good at lowering the cost of risk as opposed to getting fast. As for the dc energy to spread arbitrage game, that is the result of far reaching policy decisions well outside of HFT and I largely agree that energy is too cheap.

I think that any artificial slowing of the market is likely to have really bad unintentional issues. I'd much rather we incentivize the market to fixate on something we care about (ie price) rather than try to subvert the laws of the market.

One approach that appeals to me is to remove the sub-penny rule that is artificially propping up spreads.

[cma]

>as a market participant I largely do not care about the implementation of any given market makers risk configs

Why? It could severely hurt market liquidity (which everyone claims is so important) if there is a mistake that sparks a panic.

> was not as good at lowering the cost of risk as opposed to getting fast

Can you reword this a bit? I don't understand what you are saying.

> I think that any artificial slowing of the market is likely to have really bad unintentional issues.

Can you give some examples?

> One approach that appeals to me is to remove the sub-penny rule that is artificially propping up spreads.

This would be a decent thing to do, it would take some money out of market making, reducing the returns fueling the latency arms race a bit. Lower returns would also give less justification for some of the risks that are taken today.

A transaction tax would help in a similar way, but work more broadly against other high volume, low latency, low value traders. Index-to-underlyings arbitragers (maybe not the best example; sub-penny would decimate (hurr) them as well), etc.

[kasey_junk]

> Why? It could severely hurt market liquidity (which everyone claims is so important) if there is a mistake that sparks a panic.

Because we've seen what happens when a very major market maker blows their risk configs, it is a headlines day but the market largely recovers quickly. I'm more interested in systematic risk and I believe that any "fix" to the speed issue in HFT is likely either just going to shuffle advantage from one group to another or have unintended consequences.

> Can you reword this a bit? I don't understand what you are saying.

It was more risky to be slow than to use a central (and assumedly better) risk system. At least that was the implicit lesson learned from a market maker not using their own systems. I understand trading incentives enough to realize that might have been short term thinking trumping long term thinking, but I'd rather adjust the incentives there as well (long term bans from trading for risk limit violators maybe?)

Further, I want market makers to be able to be innovative with some of their risk controls, as I believe that it could lead to better risk controls more broadly.

> Can you give some examples?

The most common response that people trot out to "fix" HFT is to introduce batch auctions. I believe that this a) won't remove the incentives to play speed games and b) will make it harder for market makers to price spreads appropriately leading to them making them more expensive.

A transaction tax is similar. I view transaction taxes as pass throughs that will largely be paid by non-speculative investors. That is, we actually largely don't care (I don't think) about the number of transactions, so why would we use a tax to discourage them? Lets discourage what we actually want to discourage (I'm not sure what that is by the way).

> Index-to-underlyings arbitragers

I'm not so sure. In the short term they and market makers would get wrecked, but I believe quickly they would adjust (or go out of business) and the pricing models would be better for it, and spreads would go even lower.

[cma]

> Because we've seen what happens when a very major market maker blows their risk configs, it is a headlines day but the market largely recovers quickly.

Knight Capital, for example, was just at the threshold where they were effectively able to be bailed out. Nothing guaranteed it. Other large market makers are owned by banks and are essentially risking capital reserves. We haven't hit a scenario where a hit to one participant has had systemic effects, but that doesn't mean it isn't a risk.

> It was more risky to be slow than to use a central

From this and some of your other comments I see you are taking the stand that every market transaction is about pricing risk, and so talking about risk separately isn't ever a useful concept. Maybe you can say that under lots of abstraction, but it seems to make it unnecessarily difficult to communicate with people who speak of it with the normal meaning.

>innovative with some of their risk controls, as I believe that it could lead to better risk controls more broadly

Decentralizing risk controls in the way I mentioned is strictly worse in every metric but latency. Or at least there was no other explicit reason why we did it.

>The most common response that people trot out to "fix" HFT is to introduce batch auctions. I believe that this a) won't remove the incentives to play speed games and b) will make it harder for market makers to price spreads appropriately leading to them making them more expensive.

I'm not necessarily proposing batches, but a significant fraction of daily trading volume already goes through the opening and closing auctions every day. When stocks are halted and re-opened, they go through auctions as well in many exchanges, just opening right back up conceivably leads to worse pricing than the auction system with published imbalances.

My point about market hours, weekends, and holidays, is that all this stuff is based more on tradition and precedent than any kind of goals. Participants that trade through microsecond latency advantages are extracting a tax on everyone else. A transaction tax takes out a lot of these opportunities, and can be used for something more productive than the waste heat result of running a bunch of spin locks in a datacenter.

[mlrtime]

Globally markets are 24/7/365 (+/- 1s). You are speaking of just one particular market.

[cma]

Liquidity of an altogether different basket of securities (or a somewhat overlapping basket) isn't relevant to the point.