You only get information directly from the market-center once a minute, but the rest of the world (and other markets which trade continuously, or at a different frequency) are generating new information constantly. Clever and/or well-capitalized participants will be taking advantage of that information in much the same ways as with a continuous market.

In that sense, you can see what the HFT firms are doing (providing liquidity at the microsecond level) as bringing the market more in-line with reality.

Another way to look at it is that the less the market resembles reality (through regulations, such as larger defined processing intervals) the more it can be taken advantage of. Rules often provide sharp edges where there was previously a continuous curve, and sharp edges are where you can game the system.

I am trying to understand how this reflect reality. If milliseconds gives us HFT wouldn't minutes get rid of the advantage of doing HFT? I.e. the reality is determined by it being milliseconds, seconds, minutes etc. So we can control which reality we want.

As far as I understand HFT, it's not that it's better at predicting the market but rather it's better at taking advantage of micro volatility?

Or am I completely wrong?

Depending on how queued orders are served at whatever interval the market coalesces at, there will always be some type of high speed trading, even if the frequency isn't as high. In reality (as in any transaction between two individuals), there's no defined interval at which we wait to complete our transactions, we just do them. Adding arbitrary times at which transactions go through creates edge cases, and edge cases can be gamed. Current markets are limited by either an arbitrary interval upon which orders are fulfilled, or as fast as a system can handle them, which is limited by the technology in use.

For a very simplistic example of this, if you look at some type of transaction that has extra regulatory requirement/burden that kick in on certain criteria (for example, over a certain price), you should see some interesting behavior when looking at transactions immediately above and below this price level. You'll also likely find interesting solutions to circumvent that rule to capitalize on the reduced competition that allows (to my understanding, this is a semi-accurate high level overview of a part of the derivative mess we found ourselves in a few years back).

> As far as I understand HFT, it's not that it's better at predicting the market but rather it's better at taking advantage of micro volatility?

My understanding is that you are correct, but in taking advantage of the volatility, they make it a micro level volatility, and both provide a more accurate value of a stock (by reducing the spread), and at a shorter time interval (which together I guess is liquidity).

Of course that's all armchair theorizing on my part (in case it came across as overly authoritative or knowledgeable). I'm not a trader, don't work in the industry, and am not an economist. This is just the working model in my mind based on the economics as I see them and my knowledge of the markets, which admittedly is mostly from discussion here...

There will always be some high speed trading but the problem is that once you take it into an territory humans can compete then it's not going to be beneficial for that same High Speed Trading to occur.

It's advantage was that it could do it at a speed humans couldn't do.

While there is no specific speed at which we make trades we do mostly get our information from the market. If the frequency of updates go down I would guess so would the randomnes of when we make our bets. The frequency of the market affects the randomness of the order.

And yes I am really just a Layman although I did do this for Nasdaq :) http://tv.adobe.com/watch/customer-stories-air/nasdaq-market...

Humans aren't competing against HFTs on speed. That's not an accurate view of the world.

Different HFT firms are competing against each other on various bases (one if which is speed) to provide you, a human, the best service.

Thats not what I am saying either or at least not what I meant to say.

What I was trying to say was that humans simply can't do HFT and that the advantage of that is only possible if you have millisecond updates. If you remove that then you remove the advantages of HFT and humans would be able to compete.

Whether that is good or bad for the market is another discussion.

Humans can't compete in the specific thing HFT does, but I'm not sure why humans need to compete there. There's plenty of other areas that humans can compete in (such as analyzing data and market prediction), so it's not like humans are being squeezed out of the market.

I don't think making the market quantized (upon reviewing the Nanex story from last week[1], that's apparently the term) makes the problem of people not being able to compete in this small aspect of the market go away, it will just change its nature. Everyone will make trades immediately before and after the point at which it coalesces, otherwise you are leaking information to the market that might be used against you. This requires fast machines, and we're back where be began, with an arms race to see who can submit the most orders in the shortest time right before that point, and who can analyze the orders fastest immediately after (which is specifically the point I was originally making regarding. "sharp edges" and "continuous lines", since the quantized market is essentially a step function).

1: https://news.ycombinator.com/item?id=11211093

I feel like the discussion keeps getting turned on it's head now.

The original claim was that if we did by the minutes updated then there would be issues with more buyers than sellers. This was the original claim that was being used as a reason for why a minute frequency would be problematic.

I haven't seen any real explanation for why that is problematic for the reasons discussed in this thread.

Less frequent updates means less frequent available information to trade on, means less advantage for the HFT algos who won't have the advantage of being able to trade in the milliseconds anyoore, something humans can't do.

If one thinks HFT is a problem then thats a perfectly fine solution which isn't from what I can se giving problems of more buyers than sellers.

If one doesn't think it's a problem then sure we don't need to compete with them but at least to my understanding the premise of this whole discussion was that someone suggested slowing down the frequency and the answer was that this would be problematic.

> The original claim was that if we did by the minutes updated then there would be issues with more buyers than sellers.

I wasn't responding to that. My original reply to fr0sty was somewhat of a tangent. I can see where we might have been having two separate arguments with each without knowing it because of that.

> Less frequent updates means less frequent available information to trade on, means less advantage for the HFT algos who won't have the advantage of being able to trade in the milliseconds anyoore, something humans can't do.

The advantage of HFT isn't necessarily the frequency, which is just a way to increase number of trades, but speed, which is what allows them to capitalize on information before the competition. Changing how often they trade will not affect the real reason they do so, which is to capitalize on market information before the competition. That race still exists.

> If one thinks HFT is a problem then thats a perfectly fine solution which isn't from what I can se giving problems of more buyers than sellers.

My stance is that even if you think it's a problem, I don't think it provides any sort of solution. They can still make trades much closer to the cut-off and much sooner after the market coalesces than any human, so humans are still unable to compete in that particular area.

> If one doesn't think it's a problem...

I'm not sure how I feel about them, but I don't see "humans competing" as a valid reason. HFT algorithms are humans competing, just at a meta level. Whether it comes down to mental ability to analyze markets and physical reflexes without HFT algos, or it comes down to intelligence of the design of the algorithms, it's still humans competing (we could have the same argument decades ago regarding humans filling out order sheets by pen and pencil and those trading through a terminal, the technology doesn't replace, it enables).

The frequency of the stock market updates is an advantage to HFT which has the speed to trade in the milliseconds. Thats what I mean with frequency being an advantage to HFT. I.e. it's more or less the only way to trade in the milliseconds.

You take that away you take away the advantage of most HFT. I don't see how thats not part of the solution.

HFT algorithms are humans competing at a meta level which begs the question whether the value it provides is meta too. I.e. I have yet to see any benefit HFT brings to anyone but those who do HFT. It doesn't seem to help the market as far as I can see.

It's done as I said purely because it's possible with computers to trade there and it seems to be a privatized version of a tobin tax.

> The frequency of the stock market updates is an advantage to HFT which has the speed to trade in the milliseconds. Thats what I mean with frequency being an advantage to HFT. I.e. it's more or less the only way to trade in the milliseconds.

I think this is the fundamental difference in our points of view. I've outlined why I think the frequency is a red-herring, and the speed at which they can execute on information relative to other actors is the real item in question, changing the interval at which the orders are realized doesn't really affect if they are still handled on a first come first serve basis. If they aren't then HFT may be affected more adversely, but that may bring other adverse behavior that hasn't been accounted for.

You either aren't addressing this aspect of my argument at all, or I'm entirely missing it in your responses (which is entirely possible, mental context can affect interpretation quite a bit). I don't know how to continue without you either addressing that aspect of my argument, or pedantically pointing out where you already have so I don't miss it again, since at this point we're just saying the same thing to each other over and over. :/

You outlined why you think it's a red herring but that outline isn't based on what I was talking about.

Put another way. If there is no millisecond updates then there is no HFT trading. It vanishes completely. No one is having any issues with this new reality being first come first serve. So again your argument is attacking a strawman.

We know how the market looked like without HFT because we lived in a world without it. What consequences are you talking about?

It's also worth mentioning that the stock market stops every day and over the whole weekend so if reality was the key goal then it should always be open.

In other words we decide the frequency and as far as I understand HFT it provides no value because it's not reacting on outside information it's reacting on price volatility in the milliseconds which isn't really a reflection of anything much more than price fluctuation at the milliseconds.

The main advantage HFTs have over humans is that they can react quickly to new information. The frequency of new information becoming available is only an added bonus, not a requirement.

HFT don't react to the same kind of information that Humans do. HFT reacts to price at the millisecond level not to anything outside of that as far as I understand.

Your understanding here is factually incorrect.

Automated traders react to all kinds of different information not just prices. And even if it was just prices that would be enough because there are lots of different markets and you can't coordinate them all.

What else are HFT algorithms reacting to?

From Wikipedia:

"...Algorithmic trading, also called algo trading and blackbox trading, encompasses trading systems that are heavily reliant on complex mathematical formulas and high-speed, computer programs to determine trading strategies.[1][2] These strategies use electronic platforms to enter trading orders with an algorithm which executes pre-programmed trading instructions accounting for a variety of variables such as timing, price, and volume..."

https://en.wikipedia.org/wiki/Algorithmic_trading

The problem you mention is real, but first come first served is an easy solution. That also solve the order problem.

That encourage you to submit transactions earlier in time slot (as you get more chance to complete them).

Still there is some HFT strategies possible, but window of opportunity will be by an order of magnitude or two smaller.

If orders are filled on a first come first serve basis then you've just recreated the continuous market that we have today and changed nothing.

You removed the HFT advantage of being able to trade at the millisecond no?

No. Because if orders are filled first come first serve if my order arrives 1 millisecond before yours my order will get filled before yours. Just like today with continuous markets.

The continous market delivers continues information which can then be used by HFT companies to take advantage of doing something humans can't. buy and sell in milliseconds.

This is the problem NOT that one trader gets his or her orders in before the other. At least that is how I understand the problem.

If my order goes in before yours then there is a good chance that my order will get filled and yours won't. The speed at which traders (automated or otherwise) get in orders is of critical importance.

If you don't understand that, then your understanding of the problem is hopelessly wrong.

That someone get an order in before another will always be a reality. It's not a problem anymore than there are winners and loosers on the stock market.

What we are talking about is specifically removing the advantages of HFT (if one consider it a problem), not removing the fact that someone can get and order in before someone else.

How is that different than today? The big guys also have access to information that others in the market don't.