Why can't we use trading speeds such that everybody can participate, not just a few "gatekeepers"?
The average internet connection should be fast enough for trading, by now.
Can you explain why you wouldn't want nanosecond for this?
I am quite happy to buy shares where it's the most convenient for me, knowing that someone, somewhere, is constantly arbitraging stock prices on all markets so that all prices are the same regardless.
What upside is there for me, as an investor, that this happens every minute instead of every nanosecond? None, it's objectively worse.
> Why can't we use trading speeds such that everybody can participate, not just a few "gatekeepers"?
But that makes no sense... HFTs are not _competing_ with regular market participants, on the contrary they are providing a service to them. The only competitor to HFTs are other HFTs, because, well, they are providing the same service.
If you want to "participate" in something and you feel hindered by HFTs, that basically means you are not a typical investor, but rather a market maker / arbitrager, so then... competition is fair game, have fun.
Your argument is akin to "we should limit the speed of UPS trucks because I want to compete but I cannot afford to buy fancy trucks". UPS does not prevent the normal operation of package delivery, nor are they competing with people receiving packages. They are only competing with other delivery companies.
> The average internet connection should be fast enough for trading, by now.
Well even if we were to put latency aside, no, your internet connection won't cut it anyway, at least not for any kind of direct market access.
First, not anybody can "do DMA". There are a vast quantity of regulations, licenses, tests, audits, and fees to be an exchange participant. Regulators don't let just anyone participate on public exchanges, even on emerging markets.
1) Be a regulated entity, pass individual certifications, have a risk, legal and compliance team, yearly assessments, etc.
2) Pay a lot of money for access to the exchange market data live ($10k-$100k/month/exchange).
3) Have all your algos certified, risk assessed, and staged on the scenarios the exchange will provide you with.
4) There is no multicast on internet, and anyway unless you have a Solarflare/Mellanox NIC at home, and a crazy good ISP, you won't ingest 10Gb linerate that simply.
5) You need all the things around the ecosystem... symbology, security master, etc...
6) Even cash equities need to be settled, you will need a custodian and a back office, stocks are not tokens that magically change hands. Someone need to post cash, update company records, custody collateral, handle corporate actions, etc
There is no world in which a _regular_ investor will touch the markets directly anyway, everybody goes through a broker or deals with HFTs for order flow, and it's not "just because they are faster", there is a world of complexity/regulation/etc that goes with it.
Even most of the top hedge funds in the world are not direct market participants, but rather use brokers.
The very reason multistrat funds even exist and are so attractive, is that you can net your trades internally at mid and avoid even having to use lit orderbooks, reducing your market impact.
So, no, I don't think anyone sees HFTs as a hindrance, nor are willing to be market participants. This sounds sounds a bit like a naive simplification of the state of things (I don't mean it derisively, it's not a trivial subject).
I don't think this is true. They are trading on the same market as everybody else. People used to make money buying in market A and selling in market B. Now HFT has mostly taken over that role, for instance.
Anyway, finance has created a shitload of abstraction, and at this point it isn't clear if "normal" people benefit from this or that it's just the incumbents.
To make another analogy, yes, feudal lords provided some benefits to the peasants, such as safety and shelter. But you really have to step away from the entire construct to see if they are really better off. This is what is missing in your argumentation, imho.
Who is "People"?
Well now, I cannot claim to know what everyone did at any point in time, but allow me to be very doubtful that anyone other than a dedicated arbitrager/market maker would do that.
Or at least, I cannot conceivably see how one would do that and turn a profit without being also a market maker.
The economics of arbitraging are just too tight.
You need to spot and act on a cross exchange spread that is wider that:
- The exchange fees, for which market makers have rebates. So even at equal technological footing, MM will have an advantage over "People".
- The cost of funding, for which you will need to post IM, and thus already be a professional investor with a good amount of capital.
- If that was "before HFTs", then it was before odd lots as well. Now I don't know what the average price of a US share is, but let's say a couple hundreds of dollars, times 100 lot size. These "People" better be filthy rich in cash.
- Arbitraging at a couple of price levels (which is already a lot), minus costs, would yield you a couple bips per trade. To make any kind of real money doing that, you better do it a trillion times per day, and thus lock a huge amount of money.
- The market risk over the arbitraging period
I don't think I have seen anyone turn a profit arbitraging naively in the last 15 years that were not some kind of market maker already, or some ad-hoc strategy on very ad-hoc EM markets.
They aren't though that's kind of the thing. HFT Market Makers (i.e. the big HFT firms) aren't just trading in the same market. They are the market. They coordinate the trades and effectively instantly sink every buy and sell into themselves and handle the matching of those spreads.
The market makers are competing against each other to offer access to the market to you.
Nanosecond trading is honestly a bit unnecessary. There's academic studies somewhere that if I remember correctly showed little change in benefit to the stability of the market past tens of microseconds I think.
Now the reason why these ultra-high speeds in general are beneficial is because they make collaboration at scale or frontrunning information increasingly difficult the lower you make the trading latency.
This means that while your market makers like Jane Street may integrate outside data for predicting broad trends, the core algorithms for resolving spreads boil down to "what is the most efficient way to match these together" with little to no room for manipulation.
Market manipulation can cause volatility but your HFT market makers are going to eat that volatility at an incredible rate. Massive panics that would have triggered chaos in the streets and people dumping their 401ks get reacted to and their prices factored in within moments and as such prices adjust gradually rather than spiking and cratering and spiking again. HFT takes the blood out of the water so to speak.
Or as another example, HFT market makers act like a loosely attached mass (ex: heavy weighted chains) damping a piece of vibrating industrial equipment. Without the mass damping the system and actively pulling energy out of the vibrations reflecting through the chains, the equipment would rattle and rattle and more than likely the bolts fixing it to the ground would start to work their way loose. And once they are loose, vibrations can start to amplify into oscillations (doubly so if it's a "smart" system involving humans where you experience PIOs) and the stress on the system grows greater and greater. With those chains however each and every little vibration gets nearly any excess energy sucked out of it by the irregular reflections produced within the chains. That loss of energy dampens the vibrations down and while the machine is unimpeded in performing its function inside of itself, the excess energy in the form of vibrations, etc is heavily suppressed or effectively eliminated entirely helping reduce failures, stresses, and wear.
(Sorry for the overworded analogy but the mass-vibration damping analogy is really quite fitting to the way markets operate).
With the average internet latency (say 50-100ms) you can game the system and gain information early with expensive high speed links sharing the news around the world in a way that has near zero value due to diminishing returns w/ lower latency. Especially once light comes into play. If the competitive latency is on the order of distances light can travel within a country, that means once you factor out the essential parts that can't be cut out/sped up, what's left is a very small sliver that can be split between algorithms to make as efficient of trades as possible, algorithms to try and game the system, and integrating knowledge from distances proportional to the time it takes for light to travel it.
In other words at that speed you just can't really play fuck fuck games. The winning move is finding better local strategies (vs global strategies like market manipulation or exploiting information before it propagates).
/rant (sorry I should probably edit this down because I repeat myself a lot here but it's late and i'm tired so i'm just sending it.
