Australia May 'Pause' Trades To Tackle High-Frequency Trading

angry tapir (1463043) writes "The Australian Securities and Investment Commission (ASIC), a government financial watchdog, is reportedly contemplating the idea of implementing a 500 millisecond delay on trades in an effort to put the brakes on high-frequency trading. ASIC last year knocked back the idea and stated that fears about HFT were overblown. However, in a government inquiry today representatives of the organization said the idea of a 'pause' is still on the table."

Comments

Won't work

[EmagGeek]

If you simply change everyone's temporal frame of reference by the exact same amount, you have done nothing, really. Everyone will simply account for the 500ms delay, and trades will still execute in the same order.

Re:Won't work

[captainpanic]

The way I understand it is that traders (computers) have to hold on to shares for a minimum of 500 ms, which means that whatever the market does in those milliseconds cannot be acted upon. However, others can act in the meantime.

Personally, I think that it should be law that if you buy shares in any company (or fund or whatever), you have to hold on to them for a minimum of a week or a month. Shares represent actual physical companies which own factories and employ real people. Those things don't change in 500 ms. They change over a much larger amount of time. And I believe that the stock market would be healthier if this was reflected in its trading. Obviously, when new information comes out (press release: "The factory of company X has just gone up in flames"), everybody's counter should be set to zero, but shares sold in such a case cannot be bought back a fraction of a second later (because whoever just bought them has to hold on to them for a week/month).

I don't pretend that this plan is waterproof. I'm sure someone will shoot a big hole in it in the replies below... I just wish that the stock market would represent what it's supposed to represent: a place where people can invest in our real economy.

Re:Won't work

[gurps_npc]

Incorrect. One of the major issues is that HFT look at multiple markets. They see a trade go down in market a, than instantly - in less than 100 ms, change their own order in market b.

By putting in a delay of 500 ms, you prevent this kind of behavior.

Why is that behavior bad? Because for high volume traders they have to split a single order over multiple markets - mainly because others are ALSO splitting among multiple markets.

That is, say I have 500,000 shares to sell. Currently 5 different markets all show a price of 35.2, at 100,000 shares being offered

Moreover, all 5 markets offers are from you, as you are the main guy buying right now.

It is NOT fair for you to take 100,000 of my order at 35.2, then instantly cancel your four other 100,000 orders and replace them at 35.4

You offered to buy all 500,000 at 35.2, not just that 100,000 and should not be allowed to cheat me by raising your price for the remaining 400,000.

A delay of 500 ms means you can't see that your first order is executed until after all your other orders are ALSO executed.

This is one simple example of how HFT try to unethically game the system.

Re:Won't work

[Gr8Apes]

It would be better to have random delays introduced from 0-30s, which causes out of order sequencing on trades, making HFT relatively unreliable and unusable, since the high speed links currently used to facilitate those ms advantages will be entirely negated.

Re:Won't work

[squiggleslash]

Nope. That's not relevant to preventing HFT.

Quick explanation of HFT, at least, the form that hit the headlines recently. Suppose you have two exchanges, let's call them VAMPIRES and ANGELS (to pick names at random, I mean, if I've accidentally used names reminiscent of a real exchange I apologize as that's not my intention...)

A legitimate trader wants to buy 1000 shares of X at $10. It sees 500 on VAMPIRES, and 500 on ANGELS. So it immediately, simultaneously, places both orders.

Well, it turns out VAMPIRES is kinda rigged. They've made sure their connections to every trader are the fastest possible, whereas ANGELS just uses regular telco connections. They advertise this as a feature, and everyone believes them, but it turns out the founders of VAMPIRES have a hidden agenda. They've made sure they have a fast connection to VAMPIRES, and arranged with the phone company to have an equally fast connection to ANGELS. After "resigning" from VAMPIRES to give the appearance of being uninvolved, they monitor all transactions on VAMPIRES. As soon as they see all shares for X have been told at $10, they immediately place an order for all shares of X at $10 on ANGELS, correctly deducing that the only reason someone would buy ALL the shares of X on VAMPIRES is because they're buying ALL the shares on ALL exchanges for X for $10.

Because they have a fast connection to both exchanges, the HFT traders can see the trade that just happened on VAMPIRES and successfully transmit their trade to ANGELS in less time than it takes the legitimate trader's trade to be transmitted to ANGELS.

So what does the 500ms delay do? Answer: it makes it impossible to see the trade that occurred on VAMPIRES before the accompanying trade has been received by ANGELS too. The founders of VAMPIRES sees the trade 500ms+latency after it was sent by the legitimate trader. They can place the order on ANGELS anyway, but their trade will arrive 500ms+theirlatency-legittrader'slatency on ANGELS so it'll arrive afterwards and the legitimate trader will get their shares unmolested.

An alternative, but it's not terribly reliable, is for the legitimate trader to determine the latencies to each exchange and then send each order with an appropriate delay to make sure they arrive at about the same time at each exchange. It's not 100% fool proof, but RBC was able to get around HFT traders using the technique.

Install random delay

[Whammy666]

A better system is to install a random delay of between 1 and 5 seconds. This would level the playing field completely and kill off the HFT parasites.

End the Accounting tricks

[worker17]

Instead of just playing the numbers, why don't governments stop the manipulation entirely? You buy a stock, you hold it for 3 DAYS. The market adjusts for the sales and purchases instead of being artificially stimulated. The microsecond barons have to do some REAL work instead.