
Wall Street Is Sharpening Our Nanoseconds - matt_the_bass
https://www.bloomberg.com/view/articles/2018-07-02/wall-street-is-sharpening-our-nanoseconds
======
vostok
Something that confuses people is that trades don't happen that often. Batch
auctions don't change this. You still need to decide who gets priority in the
auction.

If you do time priority then it's not that different from currently existing
American exchanges.

If you do size priority then it's not that different from currently existing
American exchanges.

If you do random priority then it's asymptotically equivalent to size
priority.

Batch auctions just make it harder to quote ETFs and other products whose
prices depend on prices of other products. It's likely a net loss.

~~~
allenz
You claim that batch auctions are the same without addressing the arguments in
the article, namely that (1) HFT is unfair to smaller traders, and (2) HFT is
an arms race where the costs (materials, labor, and brainpower) exceed the
benefits.

Here's the fairness argument: a severe negative report comes out about stock
X. In a fair world, after the price updates, every investor loses the same per
share of X that they held. In the real world, HFT can sell or short X before
others can react, resulting in a net transfer of wealth from investors to HFT
firms.

~~~
tptacek
Your argument presupposes that there is some constant per-share price to be
paid for a piece of bad news, when in fact it is the function of the market,
through trading, to arrive at a consensus valuation for that news.

~~~
allenz
I can rephrase without that assumption. The argument is that high speed
traders are able to trade before others can receive or react to information.
The time advantage therefore translates to an unfair information advantage.
Compare insider trading, which we make illegal because it is unfair, even
though it improves the price signal.

The direct benefit of the real-time market vs. batch auctions is that pricing
information is updated faster in the real-time market, but is there any need
for microsecond resolution pricing?

~~~
vostok
> Compare insider trading, which we make illegal because it is unfair, even
> though it improves the price signal.

Insider trading is arguably illegal because you're misappropriating company
information for your own use. There a few other technical points, but they can
be ignored in a casual conversation.

This applies if the CEO told you something that they shouldn't have or if they
told you something in confidence and you abused that trust.

Trading on information that others don't have is generally legal and investors
do it to a much greater extent and to much greater profit than HFTs.

> The direct benefit from HFT is that pricing information is updated faster in
> the market, but is there any need for microsecond resolution pricing?

The big direct benefit comes from maintaining fair prices for ETFs and other
products whose prices depend on other products.

Furthermore, "microsecond" pricing is a very natural system. HFTs and other
market makers put out passive limit orders whenever they want. Investors and
other aggressive participants send marketable (usually limit) orders if it's
the price that they want.

It's the far more complicated batch auctions that need to justify their
existence.

~~~
allenz
The SEC says that insider trading is illegal because it "undermines investor
confidence in the fairness and integrity of the securities markets".[1]

[1] [https://www.investor.gov/additional-resources/general-
resour...](https://www.investor.gov/additional-resources/general-
resources/glossary/insider-trading)

 _Edit, previous response:

Fairness is the "straightforward", "textbook answer" as to why insider trading
is illegal. Misappropriating company information" isn't a great justification
because insider trading is still illegal even if a company explicitly allowed
employees to trade on nonpublic information.

[1] [https://blogs.wsj.com/law/2011/10/26/why-exactly-is-
insider-...](https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-
trading-illegal/*)

~~~
vostok
Just to be clear, I'm disagreeing with you because I think you're wrong about
the world as it is not because our interests are opposed. I would have far
more money if the US had a super complicated batch auction system and
everybody could only trade on public information. It would probably only have
a tiny, barely noticeable, negative effect on your life in the form of higher
spreads for ETFs and various index products.

> "Misappropriating company information" isn't a great justification because
> insider trading is still illegal even if a company explicitly allowed
> employees to trade on nonpublic information.

I am not sure why you are bringing up this specific and very complicated
example. Has this been tested in court and I'm just not aware of it? I don't
even see how a company could allow its employees to engage in insider trading
without it being misappropriation. The company has a responsibility to its
shareholders. At a minimum, this policy would have to be disclosed to
investors.

Investors very frequently use data that is not publicly available. Sometimes
it's mosaics that they've put together from smaller pieces of information that
are not public, sometimes it's body language of executives in private meetings
to which the public does not have access, sometimes it's satellite images,
sometimes it's information from IR, and sometimes it's something else. None of
this is illegal without additional clarification.

~~~
allenz
You're right, it was a poor example and I have deleted it. Perhaps we can
agree that fairness would be an adequate justification for making insider
trading illegal, and by analogy, that it would be an adequate justification
for switching to batch auctions. If so, you have the burden of proof to show
that the benefits of microsecond resolution outweighs our considerations of
fairness.

~~~
vostok
> Perhaps we can agree that fairness would be an adequate justification for
> making insider trading illegal

I don't think that we agree on this. The way that I see it, investors always
try to leverage information asymmetry and I don't see how you could
realistically outlaw it.

That's what makes HFT so hard. The people who are trading against you
inherently know more than you do. They've talked to the companies, they've
researched them, etc. Meanwhile HFTs stand by willing to buy and sell just
below and just above mid market without any of that information.

This is also why HFTs are willing to pay for retail order flow. At least you
know that the retail orders probably don't know more than you so you're able
to capture a greater fraction of the spread.

Of course retail orders are a small fraction of all orders and an even smaller
fraction of orders on the exchanges.

~~~
allenz
I just found the SEC's official justification and amended my original comment
above. I don't think you're going to win an argument against the SEC.

~~~
vostok
You may be interested in reading Salman v. United States [1]. It's a dense
read so here's a news article [2] that I'll quote.

> The justices rejected claims of defense lawyers who argued that there was no
> crime because no money exchanged hands between the insider and the stock
> trader.

> Instead, the court said exchanges within a family are like gifts and have
> value, even if no dollars are paid.

Sounds a lot like misappropriation is the concern and not merely having access
to information that others don't.

This is a case that's widely seen as making it _easier_ to prosecute insider
trading.

[1]
[https://supreme.justia.com/cases/federal/us/580/15-628/opini...](https://supreme.justia.com/cases/federal/us/580/15-628/opinion3.html)

[2] [http://www.latimes.com/business/la-fi-supreme-court-
insider-...](http://www.latimes.com/business/la-fi-supreme-court-insider-
trading-20161206-story.html)

~~~
allenz
True, it's easier to prosecute insider trading as a breach of fiduciary duty
to the company. But why were insider trading laws passed, and why is insider
trading prosecuted? The SEC answers that "moral imperatives have driven the
development of insider trading law in the United States."[1] The prosecutor
against Salman, Preet Bharara, stated that "today's decision is a victory for
fair markets and those who believe that the system should not be rigged."[2]

[1]
[https://www.sec.gov/news/speech/speecharchive/1998/spch221.h...](https://www.sec.gov/news/speech/speecharchive/1998/spch221.htm)

[2]
[https://www.nytimes.com/2016/12/06/business/dealbook/supreme...](https://www.nytimes.com/2016/12/06/business/dealbook/supreme-
court-insider-trading.html)

------
perl4ever
Has anyone considered the effect of general relativity on syncing clocks on a
nanosecond level over large areas?

I previously read about this topic and it didn't seem to occur to the author
(who may have been Levine in fact) that basic physics (not that I'm that
knowledgeable about it) puts a limit on how finely you can order physically
separated events.

[https://en.wikipedia.org/wiki/Relativity_of_simultaneity](https://en.wikipedia.org/wiki/Relativity_of_simultaneity)

~~~
dooglius
No, there is only a limit on an order of events that holds across all possible
reference frames. If you define a fixed reference frame, there is no problem.
Presumably, they define the same reference frame as whatever UTC uses.

~~~
6nf
The reference frame is the location of the server. Whoever is closer to the
server has an advantage because someone half way around the world will take an
extra 50ms or whatever to submit their order.

~~~
perl4ever
Syncing clocks implies to me that you're not just executing trades in the
order of arrival. You're trying to determine which trade "actually happened"
first. Hence the doubt I had about the relativity of simultaneity.
Incidentally, I think I was mistaken about "general" relativity being
applicable. This is probably just a "special" relativity problem.

~~~
6nf
That's not how it works. First to get their order to the server wins.

------
alimw
> If people want to trade stocks every hundredth of a nanosecond, why not let
> them?

> but if that meaningless-seeming competition between high-frequency trading
> firms helps subsidize basic research to improve our understanding of time
> itself, isn’t that kind of cool?

Seems to me this guy is really struggling to reach the conclusion his editor
wants..

~~~
seem_2211
Not really, that's the general writing style of Money Stuff (which is what
this column is).

~~~
alimw
How on earth did you interpret my comment as about "writing style"?

------
mwnivek
Related discussion, from a week ago:

[https://news.ycombinator.com/item?id=17429625](https://news.ycombinator.com/item?id=17429625)

------
ggm
Personally I think this adds no value to the social goodput of trading: its
not market informing of real movement, its profit (rent?) seeking in dis-equal
access to service.

I understand the profit motive. I just don't think that for trades, informing
community of value (prices, derivitives, futures) that moving to femto-seconds
is adding value.

"I made a lot of money because I have faster komputer than u"

~~~
hermitdev
Theory is the faster the market is, less the room for arbitrage, and better
for the day trader. HFT has certainly narrowed the spread.

Big problem currently is moving large block (institutional) trades without
affecting the market. Thats why a good chunk has moved to dark pools. (I work
for a dark pool ATS).

~~~
srtjstjsj
Day traders are a different form of arbitrage.

------
russellbeattie
Eventually I have to believe even the financial institutions will decide that
the current system is neverending, and they'll work out a system of
simultaneous bidding. There's no reason why there can't be a tick-tock where
trades queue until then next tick, and then are dealt with according to a fair
algorithm of some sort.

~~~
osrec
I know people may down vote you, however, a new kind of auction system to slow
things down could potentially make the market fairer for all participants. The
average guy will probably never be able to compete with the big boys that are
collocated in the same data centre as the exchange with full access to the
order book.

------
millstone
If stock exchanges were slowed down (say discretized to a second) would faster
shadow exchanges just pop up?

~~~
kgwgk
Why would anyone but high-frequency traders want to use it? And in that case,
HFT would be on aggregate a losing proposition.

~~~
dllthomas
> Why would anyone but high-frequency traders want to use it?

Substantially lower spreads, possibly.

------
erdewit
In one hundredth of a nanosecond, light travels 3 mm.

~~~
srtjstjsj
a nanosecond is a foot; a picosecond is a grain of ground pepper. -- Grace
Hopper.

[https://vimeo.com/214855845](https://vimeo.com/214855845)

