
The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Solution [pdf] - troydavis
https://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf
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troydavis
> We argue that the high-frequency trading arms race is a symptom of a basic
> flaw in the design of modern financial exchanges: continuous-time trading.
> That is, under the continuous limit order book market design that is
> currently predominant, it is possible to buy or sell stocks or other
> exchange-traded financial instruments at any instant during the trading day.
> We propose a simple alternative: discrete-time trading. More precisely, we
> propose a market design in which the trading day is divided into extremely
> frequent but discrete time intervals; to fix ideas, say, 100 milliseconds.
> All trade requests received during the same interval are treated as having
> arrived at the same (discrete) time. Then, at the end of each interval, all
> outstanding orders are processed in batch, using a uniform-price auction, as
> opposed to the serial processing that occurs in the continuous market. We
> call this market design frequent batch auctions.

~~~
AnimalMuppet
This raises a question in my mind. 100 milliseconds seems really short, but I
could be wrong. But rather than guessing, you could optimize the time
interval. Find t, the time interval, such that dF/dt = 0, where F is some
function that...

That what? That reflects the efficiency of the market? That minimizes some
measure of the turbulence in the market? That minimizes the incentive for
high-frequency trading? Some combination of all of the above? What's the right
measure of success for this?

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ham_sandwich
Is an HFT arms race necessarily a bad thing? Doesn’t the market in general
benefit from these firms viciously competing to grind out
spreads+inefficiencies?

I know very little about HFT, but it seems like we’ve gone past “peak HFT
margins”. With the Virtu+KCG merger, firms like Jump doing microwave stuff, it
seems like return on assets for these firms could have already peaked.

~~~
troydavis
The authors address this in a few places. The gist is that arbitrage became
much faster but not more efficient. Here’s a summary from page 6:

> The usual economic intuition about obvious arbitrage opportunities is that
> once discovered, competitive forces eliminate the inefficiency. But that is
> not what we find here. Over the time period of our data, 2005–2011, we find
> that the duration of ES-SPY arbitrage opportunities declines dramatically,
> from a median of 97 milliseconds in 2005 to a median of 7 milliseconds in
> 2011. This reflects the substantial investments by HFT firms in speed during
> this time period. But we also find that the profitability of ES-SPY
> arbitrage opportunities is remarkably constant throughout this period, at a
> median of about 0.08 index points per unit traded. The frequency of
> arbitrage opportunities varies considerably over time, but its variation is
> driven almost entirely by variation in market volatility. These findings
> suggest that while there is an arms race in speed, the arms race does not
> actually affect the size of the arbitrage prize; rather, it just continually
> raises the bar for how fast one has to be to capture a piece of the prize.

