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

Posted by samzenpus on from the slow-it-down dept.

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."

21 of 342 comments (clear)

  1. Won't work by EmagGeek · · Score: 5, Interesting

    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.

    1. Re:Won't work by captainpanic · · Score: 5, Interesting

      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.

    2. Re:Won't work by operagost · · Score: 4, Insightful

      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

      This is enough to show why your idea won't work... unless you plan is really to collapse the economy. What information is major enough to allow immediate sales of stock, and who gets to choose?

      --

      Gamingmuseum.com: Give your 3D accelerator a rest.
    3. Re:Won't work by JoeyRox · · Score: 5, Insightful

      It will work. The majority of HFT's illicit profits accrue from speed arbitrage *between* the exchanges, not from a speed advantage at any particular exchange. A co-located HFT server at an exchange sees an order, and, in anticipation of that order representing a larger order that can't be filled in full at that same inside "best" price at that exchange, trades ahead of the order by sending a buy/sell order to other exchanges faster than the original buyer/seller can, resulting in a riskless vig for the HFT trader. By delaying orders on all exchanges by 500ms, the benefit of early-access to incoming orders on any particular exchange is eliminated because all the exchanges will have 500ms of order price discovery incorporated into their SIP, the consolidated price representing the aggregate of the best prices for all the exchanges.

    4. Re:Won't work by OzPeter · · Score: 4, Funny

      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.

      I purpose the the stock market should really go back to its roots, and that every share should be attached to a genuine item of stock - be that cow, pig or chicken. And that you are responsible for housing and feeding all the stock that you own.

      This would also have the interesting effect of changing our perception of Bull and Bear markets.

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    5. Re:Won't work by gurps_npc · · Score: 4, Interesting
      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.

      --
      excitingthingstodo.blogspot.com
    6. Re:Won't work by KingOfBLASH · · Score: 5, Insightful

      Well let's say you want to buy a share, who do you buy it from? Or let's say you want to sell a share, who do you sell it to?

      It used to be you'd actually have to find someone to step in and take the contra side of your transaction. That's a pain in the ass, will cost you time and money, and in the event you need to sell and everyone else wants to sell you're screwed. All of this would mean that unless you had lots of money to invest, the stock market was not for you.

      Fast forward to today. We have people willing to take a position, any position. They provide "liquidity" for the market by buying the share you wanted to sell, in the hopes that they can turn around and sell it for a fraction of a cent more when someone comes along with a buy order. They actively manage their inventory of shares (yes that's a thing), and adjust prices in the event information comes out causing a large price change in the shares.

      This is a service that needs to continue if you want modern markets to maintain their efficiency.

      Now here's the problem. Back when the "marketmakers" were actual human beings buying and yelling at each other in trading pits one would not be substantially faster than another. But, using computers, there's an arms race for speed. If you can get a few miliseconds (or even nanoseconds) faster than your competition, you can take all of the profitable orders. This means if you plough enough money into speed, you can just own the market. In addition, because computers are so fast, your computer can make many millions of silly trades before a human trader can push the big red stop button.

      Now a solution needs to come about. But, because of the need for market makers speed can't really be limited to holding onto shares for months. (Sorry). 500 ms basically breaks the arms race since it's a very easy speed to obtain. So, you can't just plough money into being the fastest kid on the block.

    7. Re:Won't work by ysth · · Score: 4, Insightful

      There's no need to set a minimum time; what is needed is a minimum tax or fee. It could be .01% and still completely put a stop to abusive trading.

    8. Re:Won't work by L4t3r4lu5 · · Score: 5, Informative

      It's front-running by machine. If a person-trader did this, they'd be in jail.

      "... the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers."

      --
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    9. Re:Won't work by Gr8Apes · · Score: 4, Interesting

      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.

      --
      The cesspool just got a check and balance.
    10. Re:Won't work by squiggleslash · · Score: 4, Interesting

      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.

      --
      You are not alone. This is not normal. None of this is normal.
    11. Re:Won't work by TheRaven64 · · Score: 4, Insightful

      The important issue is the ratio between investors and speculators. You need speculators in the market to provide liquidity, but you don't want too many because liquidity is the positive spin on volatility. If you have too high a ratio of speculation to investment then the market becomes completely decoupled from the thing it's trying to represent and it becomes a dangerous place for investors (and companies) because they can lose all of their money as a result of something completely unrelated to the actual profitability of the company. If you have too few speculators, then it becomes difficult to buy and sell shares.

      The problem with HFT is not really HFT itself, it's that it magnifies the effects of speculators on the market, meaning that you need far fewer speculators with far less capital to have a disproportionate effect on the functioning of the market.

      --
      I am TheRaven on Soylent News
  2. Better article by homb · · Score: 5, Informative

    There's a gripping article over at the NY Times (adapted from a just released book) that explains very well the pitfalls of HFT, where the problems are mostly due to the haves and have-nots, just like in most things. The article is at http://www.nytimes.com/2014/04...

    Not having a level playing deck in an exchange is a major problem for the correct functioning of said exchange.

  3. Install random delay by Whammy666 · · Score: 5, Interesting

    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.

    --
    When all else fails, run.
  4. End the Accounting tricks by worker17 · · Score: 4, Interesting

    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.

  5. random delay not enough... by Junta · · Score: 4, Insightful

    Again, you have an 'average' 3 second baseline to compete against. What you really want to do is accumulate trades into a queue, have said queue stop taking new trades for some period of time, then process that queue in random order. Then there truly is no difference whatsoever between trades getting in within a quantum of the trade processing slice.

    --
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  6. TAX THEM! by Anonymous Coward · · Score: 4, Insightful

    Add a 1% tax to all stock SELL orders where the seller has held the security less than a day.
    Lower the tax to 1/2% for SELL orders where the seller has held the security for less than a week.
    Lower to 1/4% for securities held less than a year.

    This scheme would:
    a) Raise a large amount of revenue
    b) Constitute a 'use tax', kind of like a road toll.
    c) Only affect people engaged in short term trading (e.g. wall street manipulators)
    d) Act as a brake to prevent market volatility (e.g. the flash crash)
    e) Be immediately shot down by Teapublicans asshats, so it won't happen.

  7. HFT = a cost to society by advid.net · · Score: 4, Informative

    What really annoy me with HFT, besides not being "fair", it that it as a cost and that the society doesn't benefit from it.

    Building a stock exchange with top-notch computers if fine, since there is a need fulfilled here for our society.

    But building new warehouses as close as possible to stock exchange computers to house top speed fiber connected computers, just to lower the delays from 600ms down to 10ms or so, to allow HFT, is a waste of resources.
    No one needs that, it's just a smart way to build a sucking vampire over information systems. And this cost is always somehow reflected to society.

    One big bank of my country paid a lot to move all its crucial infrastructure abroad, in such new buildings, to be able to compete in HFT.
    Who's paying for those efforts? The company, the bank, instead of doing something more useful to society (investments to improve their services, etc).

  8. Re:Yikes by lorinc · · Score: 4, Insightful

    Stop the bullshit. You're not changing your mind, you're trying to gain a lot very quickly by gambling.

    If you don't understand the implications of what you're doing, please go to the casino instead of messing up our global economy.

    --
    Video of some good progressive thrash music
  9. Add Delay by randallman · · Score: 4, Funny

    They could switch the trade system to .NET. As London discovered, delay functionality is already built in.

  10. Re:Yikes by i+kan+reed · · Score: 4, Insightful

    The traders are the only people who gain tangible benefit from that, though. It's only their insistence that makes the spread so small, and the duration so large.

    The rest of us are interested in laws that facilitate investment, you're interested in laws that let your manipulate people with less immediate knowledge of the market than you.