That's a very clever comment, but I think you should include something indicating why for those who don't know how HFT works.

If nothing else, it means that firms that can afford to collocate their servers in the cage next to the exchange's servers have an advantage over those that can't.

It seems like something like the roundtrip time for a packet from NYC to Tokyo would be a fair "speed limit" for exchanges, and ensure that all firms, globally, are on an even footing.

I think you'll find, when you try to get down into it, there's no easy way to enforce a speed limit. It's a naturally arising behaviour. You could try making a market that crosses orders every X seconds, but then you move the speed to the edge of those periods.

If you wanna slow down HFT, then kill the stupid restriction that stocks be priced in pennies. With 8 digits of resolution, HFTs would then be forced to compete on price.

That's an interesting idea. Is that rule just a holdover from the days of manual accounting?

From my own conversations with exchanges -- I think this is just the exchange appealing to layman investors. The exchange wants to appear liquid, and they like to do this by having a lot of shares on the best bid or offer. If you reduce the tick sizes, you'll definitely see fewer shares on the inside bid or offer (even though you'll see more shares on the inside x% for any x, aka. you'll see more liquidity), but the layman investor (e.g. mom and pop, retail traders, people like brad katsuyama, etc.) will suddenly think you're less liquid because the best price now has fewer shares.

That's, at least, the strongest argument I've heard for why tick sizes aren't reduced more rapidly.

The round trip time between NYC to Tokyo is very short; Any computer system could beat any human, even at that scale. I'm not sure what you think you'd accomplish here; you'd just have HFT with 150ms response times instead of 1us. But you'd still have HFTs.

Yes, obviously.

The point is that there would be no incentive for HFT firms to invest endless money and effort trying to eek out a few more microseconds because that would no longer be a viable trading "strategy" (if you can even call it that).

The problem with HFT firms isn't that they're fast, it's that their only focus is being fast. There are all kinds of interesting algorithmic trading strategies that use data analysis or complex models to make rapid trades: those systems are adding information to the market and making it more efficient. In contrast, pure HFT only adds dubiously-necessary "liquidity" by being quicker on the draw than other firms.

I'm not sure where you get the impression HFT firms only focus on speed. They focus both on being smarter (having better signals) and being faster; it's only very niche HFT firms which rely entirely on speed as their edge.

Also, what's your goal here? It doesn't sound like it'll necessarily impact the profits of the HFT industry as a whole if you do this, merely lower the cost, so on net making the average HFT firm richer.

Lowering costs should allow more firms to enter the market, not just pad the profits of existing participants.

If a HFT firm is richer because they're smarter, I don't have any problem with that. That's how investing works. Developing smarter ways to analyze data, setting prices accurately, having a market that responds to new information, these are all social goods.

I am less convinced that everyone trying to be in the same datacenter as the NYSE (https://www.bloomberg.com/news/articles/2016-04-13/inside-eq...) adds any value for society.

I mean, I'm all for lowering costs in the HFT industry, it'll mean the company I work at makes more money -- I just didn't realize you were arguing for the industry, not against it. I don't think any HFT firm would disagree with lowering costs to themselves, the same way they'd prefer that CPUs were never upgraded (so they didn't have to waste money buying the latest ones).

Co-location is good because it commoditizes the closest location to the exchange. Speed always matters, even in randomized auctions, even if you have artificial latencies added to your order, even if... Without co-location done the way it is now, you get into situations where a single firm buys the actual nearest location, and has a monopoly over being the fastest competitor. Now, anyone can access it.

> Now, anyone can access it.

Where "anyone" = any investment firm with millions of dollars to spend on their IT. :)

Yes, things costs money. It costs on the order of several thousand per month (on the upper end), not millions of dollars -- moreover, this is commensurate with the cost of actually running such a data center (which the exchange sponsoring the colo typically does). I would also argue that, for anyone who actually receives any benefit from being colocated, several thousand dollars a month in operating costs is not prohibitively expensive.

It is useful if you start thinking about products whose prices depend on the prices of other things.

Suppose that I'm a SPY trader. I need to know where a bunch of other things are trading in order to figure out where I should be quoting SPY.

If I only know those prices on a second stale basis then I can't get my hedge off and so I can't quote SPY as tightly. I lose, investors lose, and investment banks win because they're better adapted to trading where prices aren't clear.