The Aleph Blog » Blog Archive » 23,401 Auctions

23,401 Auctions

I’m fascinated at the degree of hatred for high frequency trading [HFT] among my fellow portfolio managers, particularly those that live in the Baltimore area.  I have my own techniques for dealing with them: discretionary reserve orders, and not trading much.  If you are a longer-term investor, the games that exist in buying and selling in the short-run don’t matter much.  In my opinion, HFT milks short-term traders the most.

But I have my own solution to high frequency trading: revamp all markets such that there is one auction per second in the trading day.  Auctions happen at the top of each second: 9:30:00.000000… 9:30:01.000000… … 16:00:00.000000.  Additionally, orders still standing at the start of any second may not be cancelled for the next second.

Auctions once per second.  Click, click, click, click…  23,401 auctions per day offers more than enough flexibility to buyers and sellers.  No truly economic commerce would be hindered by such an arrangement.

Why would anyone argue with this?  It splits the difference, and brings order to markets where many are presently skeptical of the validity of the markets.

I’m open to other ideas here.  I toss this out as a way of making markets more transparent.  Transparency aids validity, which aids legitimacy, eventually.






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8 Responses to 23,401 Auctions

  1. [...] – How to deal with HFT’ers? [...]

  2. Lloyd says:

    A minimum active time for an order to be open for execution is the simplest and easiest to enforce. No exceptions.

    The current minimum is the speed that the computers will operate. That is apparently too little. Some amount of time that is longer than a human can execute at would be too much. One second is an interesting compromise.

    The issue still might be market-making and HFT’s role as a market making entity. Resolving that could have the add on effect of solving other issues.

  3. [...] Two different ways to deal with high frequency traders.  (Aleph Blog, WSJ) [...]

  4. slackful says:

    The hatred is indeed fascinating. As is the presumptuous comment “HFT milks short-term traders the most”. HFT doesn’t milk anything. It’s a business that makes profits by providing a service to the market. The sausage factory isn’t pretty, but the residue is liquidity and prices that are more accurate, given what’s knowable, than they otherwise would be. This is a basic fairness concept for both sides of the trade. Putting artificial limits on the technology makes about as much sense as restricting how quickly Walmart can move product to market and manage inventories, based on some fuzzy idea that humans just don’t need to receive razor blades that efficiently, that there is no social value to that. That portfolio managers cannot understand such basic business concepts, and so misunderstand the infrastructure that enables there jobs, and hate that which saves them and their customers money, is astonishing. It’s as if I keep running into people who tell me gravity pulls up.

  5. cig says:

    It’s not that the 1-second auction idea is bad, but is it relevant? You may find out that there are not many markets today that have (much) more than 1 trade a second on average, and for these 1-second slicing will hardly change anything.

    Which brings us back to your initial point: the HFT hatred is really overdone, for what is really a minor distraction.

    • With small cap stocks, most auctions would end with no shares traded. That’s true in the current system as well, but it would standardize orders that must be good until the second expires.

      Aside from that, this is not to you, cig, I do not favor the ideas of Kalecki for the same reasons I do not favor the ideas of Keynes. Too much aggregation oversimplifies the economy, and does not do justice to the dynamism that economies have when they are not over-regulated.

  6. slackful said:
    HFT doesn’t milk anything. It’s a business that makes profits by providing a service to the market

    While some HiFTers may provide a service to a portion of the market in the form of immediate liquidity and narrower spread for a single small transaction (lets call these agnostics electronic market-makers), and while the same/similar agnostic market makers may eventually fulfill a useful role in delivering larger liquidity at a point in time at prices not dissimilar from where the real buyer and real seller might have met in the market, it is disingenuous to attribute these useful pursuits with the numerous other forms of HiFTer who pay lip service to “usefulness” and “service” to gain privilege in order to pursue order-sniffing and predatory trading tactics that ultimately intermediates – to the detriment of the real seller and the real buyer – by pushing the seller closer to transact at the average bid, and the buyer closer the average offer.
    Not that specialists or block-desks were appreciably better (though some were), though I think it is just dishonest to suggest all or most HFT is benign, or “doesn’t milk anything”. I have high regard for true electronic market-making (a-la Timber Hill) and encourage “Slackful” to take a stab at attributing activity percentages to benign and predatory (and any other category) he/she might be descriptively useful.

  7. [...] more rational market than what we currently have, by limiting the ability to cancel orders — all orders must be good for at least one second.Markets need good rules and structure to work well.  Rather than having shadowy computer [...]

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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