Because speed is an implicit and intrinsic "figure of merit" in automated market making: if you are faster than other market makers, you outcompete them.

There are two straightforward problems with microsecond-speed electronic trading:

* At very small timescales, possibly as a sort of inevitable consequence of the CAP theorem, correlations between instruments that should trade in lock step start to break down. Since you can make money correcting these mispricings, time and energy gets sunk into doing that, and that imposes costs on the rest of the market. It's uncertain how high those costs are, but they are small, and clearly a pittance compared to non-automated market making.

* Electronic trading provides very nice paychecks for pretty interesting technical work, which means some talent gets attracted to the market that would otherwise get paid less money doing something with more social value. How big a deal this is to you depends a lot on your worldview.

To me, neither of these issues seems worth the galactically high cost of restructuring all the markets in such a way that we'd reliably avoid these problems.

That's circular reasoning: right now speed is a figure of merit because that's how the game has been designed. I'm suggesting to change the game rules.

I don't mean to get rid of automatic market making, I'm saying the exchange could just move to a system where it checkpoints every 10ms or whatever, still much faster than humans can blink, but no detriment to the algorithms. Then everyone has 10ms to come up with orders that make sense in the current market situation, instead of the ridiculous timing game.

You've misunderstood what I'm saying. I agree with you: timescales far below anything that provide any meaningful social value are an intrinsic figure of merit (usual definition: "often arbitrary-seeming number people compete over") of the market microstructure we have now.

I'm not saying the markets must function this way, only that they do, and it's not evidence of a giant conspiracy or grift that they do.

The rest of my comment suggests that while we could potentially quantize the markets, it doesn't seem like we have much to win from doing that, and, further, that it's likely that the problems we're trying to solve by doing that would persist.

You don't actually have 10ms to act in the scenario you describe. Because there is new information entering the world at all times, you would want to wait until the last possible microsecond before the end of the 10ms window before entering any bids.

The window does nothing to remove the need for speed.

The world is a continuous system. No matter how hard you try you can't force it to be discrete.

(There are other problems in your proposed scenario to having to do with mismatched buy vs sell volume, but we'll ignore those for now.)

What new information?

I think the above poster meant to imply that the 10ms delay would cover all market transactions, so if you put in an order now, then no one knows it till the next 10ms stop post.

Essentially its buffering all the data then releasing it at once, so it's not a truly continuous system anymore.

> What new information?

Trades occurring at other locations. Even if the other location are operating in discretized time, there's going to be variability in how fast different market participants can transmit information from one location to another. From Wolfram Alpha, Tokyo to NYC is 36ms at speed of light in vacuum and 51ms at speed of light in fiber, so someone with a faster network could be multiple discretized ticks ahead.

> What new information?

Stuff that happens in the real world. The stuff that all security prices are eventually based on. It's not a closed system you know?

Ah, that's why I wanted an example. Your answer is fairly obvious, but it's pretty absolute too so there's no way to ask questions like "is this information actually going to affect the bid size or price of a bidder?" or "is this event important but infrequent, like quarterly reporting?"

For example, infrequent important events will result in a race for people to submit at the last microsecond, but because they're infrequent 99% of the time the 10ms buffering will effectively change the behaviour of market participants.

At the level of a penny, which is what the minimum price change is on most US stocks, almost anything can affect a sophisticated market-maker or proprietary trader's pricing: information in the stock's own order book, the price of related securities globally like the same stock trading in foreign markets, prices of correlated stocks, index futures prices around the world, his or her risk exposure in that stock and others in a portfolio, foreign exchange and interest rate market shifts, news feeds, sentiment analysis of online sources like twitter, company exposure to oil or other commodity price changes, etc. etc.

That's silly, because it's an universal truth. Yet they still close the exchange and the dumb traders go home to sleep.

You can design the rules to optimize for one thing or another, continuous world notwithstanding. I'm suggesting a way to optimize for something more useful.

And I'm saying that your optimization wouldn't accomplish any goals that you might have.

Exactly. Instead of the game being "who communicates fastest" it would be "who can time the sample rate the best"

There are plenty of solutions to that but it wouldn't even be a problem if exchanges weren't -selling their order flow before the trades happen-

Can you give an example of an exchange that sells the order flow before it happens?

Are you perhaps confusing exchange in this case with a broker?

By selling order flow brokers have reduced your commissions significantly (and all the way to zero in the case of robinhood.com).

This is good for you, not bad.

Let's say that happens. The system checkpoints and everyone orders off those checkpoints.

What changes? What's the end result? How do normal people or society benefit? What would have to happen for the change to be declared a success. Conversely, what would have to happen for the change to be declared a failure?

The benefit? People don't have their order front runned by algorithm which will sell it back to them at a slightly higher price, skimming money off the top to no one's benefit.

Can you explain in as much detail as possible exactly how algorithms are front-running people's orders? Can you do it with an example of a specific kind of order, preferably down to where exactly the order is being placed? Then we can dig into the specifics and evaluate the claim being made here.

He can't, because he's wrong.

Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities. HFTs are able to make money on fees by having special access not only in terms of latency but in terms of ordering.

All public exchanges are required to have public approval for all of their order types and you can look up how they behave at any time.

> Exotic quote types and being paid for making the cross is where this explanation seems to hit market realities.

What exactly is an "Exotic quote type"?

Do you mean order type because there is a huge difference. If you don't understand the difference it makes it hard to take your assertion seriously.

The fundamental issue is Fisher consensus - arbitrage is a feature in other words.

A couple of things:

1) It is a common fallacy that there is "the exchange" or "the market". The market is an aggregation of exchanges (and non-exchange traded instruments) across a wide variety of jurisdictions and localities. But even though there is no central coordination between all that jumble, the instruments are correlated. That is, the change in price, demand, or availability of one is a signal about the pice, demand and availability of the others.

2) The market is made up of participants who exist on a band of price/time sensitivity. That is, someone like a retail trader doesn't have extreme price sensitivity but may have time requirements. In trading that style of participant is known as "dumb" (oh traders, you so PC).

3) Market makers make all their money trading spread for time but thats not where the latency games come into play. The latency is because...

4) Smart money is price sensitive (or price informed) and they tend to be where market makers lose money. Smart money tends to be either prop traders with particular algos, large block hedge funds or other market makers. Those are the people who cause market makers to play latency games, because its a vector a market maker can control that keeps them smart. They will never be smarter than the hedge fund that knows its going to buy a bunch of shares and therefore drive up the price, but they can at least jump out of the way quicker than the other smart money.

It is a common fallacy that retail orders ever go to stock exchanges. This is a good way to determine someone telling the truth. Here's proof: http://www.nanex.net/aqck2/4704.html

If you're doing market making, note that you're more likely to get a buy order filled when the market is going down, and more likely to get a sell order filled when the market is going up. This is the flip side of getting to "capture the spread".

So in order to be successful, especially when your margins are razor thin (and they pretty much always are), you have to be very, very good at canceling your orders as quickly as possible any time it looks like the market is likely to move against you.