Thanks! In reading about this, I saw that that batch auctions had been proposed and tried in various financial markets, but they hadn’t caught on, so it’s interesting to see some of the pushback.
I’m not super convinced by the arguments in that post. I think a lot of them are begging the question wrt whether to prefer continuous or batched trading. I.e. given that trading is continuous, HFT does provide a lot of utility in various ways, e.g. reducing spreads between distant markets. But the reason those spreads exist is because continuous trading creates the possibility for something to happen in New York while your order is on its way from Chicago. You could equally solve that problem (at least partially) by imposing some kind of delay or using batched auctions with a shared logical time.
The one point which may be a crux is “Feedback Loops in Global Supply and Demand Negotiation”. If it is the case that there is meaningful price discovery done by back-and-forth negotiation over hundreds or thousands of “market ticks”, then this is a point against batched auctions.
Also I think the interesting case on prediction markets now is on relatively thinly traded markets, where reactions still tend to be on “human” timescales (someone doomscrolling twitter for news vs someone doing a monthly forecast, rather than two bots competing against each other). I think a lot of the logic about HFT doesn’t really apply in this case.
if you are desperate to trade I am here to trade with you right now … you just need to pay a fee by crossing the spread
Part of my claim is that this use case doesn’t generate a lot of utility in prediction markets, and that serving it comes a cost to the majority[1] who wouldn’t mind waiting.
(I’m not the original person you’re responding to but I came here to say something similar to them)
given that trading is continuous, HFT does provide a lot of utility in various ways, e.g. reducing spreads between distant markets. But the reason those spreads exist is because continuous trading creates the possibility for something to happen in New York while your order is on its way from Chicago. You could equally solve that problem (at least partially) by imposing some kind of delay or using batched auctions with a shared logical time.
I think this isn’t why HFT reduces spreads (and I think the HFT front-running thing is a conspiracy theory with basically no evidence?). HFT lets market makers have high volume while reducing the risk of each individual transaction.
The risk of your counterparty knowing something you don’t is always there, whether it’s prices on another exchange or reading announcements faster than you or having insider information. Market makers are fine with that risk because they can protect against it by selling slowly and making a lot of sales. If I offer to sell you shares of 10 shares X of $1 and you buy all of them, I might offer a few more and see what happens, but if you continually buy all of them no matter the price, I’m going to stop offering because clearly you know something I don’t. But I can do all of that negotiation in seconds with HFT, so I can offer 10 shares at a time and still sell tens of thousands per day. But if my only choice is to offer one big block of shares per day, then there’s a huge risk that I’ll lose money on that trade and I need to increase the bid/ask spread to stay in business.
Thanks! In reading about this, I saw that that batch auctions had been proposed and tried in various financial markets, but they hadn’t caught on, so it’s interesting to see some of the pushback.
I’m not super convinced by the arguments in that post. I think a lot of them are begging the question wrt whether to prefer continuous or batched trading. I.e. given that trading is continuous, HFT does provide a lot of utility in various ways, e.g. reducing spreads between distant markets. But the reason those spreads exist is because continuous trading creates the possibility for something to happen in New York while your order is on its way from Chicago. You could equally solve that problem (at least partially) by imposing some kind of delay or using batched auctions with a shared logical time.
The one point which may be a crux is “Feedback Loops in Global Supply and Demand Negotiation”. If it is the case that there is meaningful price discovery done by back-and-forth negotiation over hundreds or thousands of “market ticks”, then this is a point against batched auctions.
Also I think the interesting case on prediction markets now is on relatively thinly traded markets, where reactions still tend to be on “human” timescales (someone doomscrolling twitter for news vs someone doing a monthly forecast, rather than two bots competing against each other). I think a lot of the logic about HFT doesn’t really apply in this case.
Part of my claim is that this use case doesn’t generate a lot of utility in prediction markets, and that serving it comes a cost to the majority[1] who wouldn’t mind waiting.
(I may come back and respond to more later)
In some information-weighted sense
(I’m not the original person you’re responding to but I came here to say something similar to them)
I think this isn’t why HFT reduces spreads (and I think the HFT front-running thing is a conspiracy theory with basically no evidence?). HFT lets market makers have high volume while reducing the risk of each individual transaction.
The risk of your counterparty knowing something you don’t is always there, whether it’s prices on another exchange or reading announcements faster than you or having insider information. Market makers are fine with that risk because they can protect against it by selling slowly and making a lot of sales. If I offer to sell you shares of 10 shares X of $1 and you buy all of them, I might offer a few more and see what happens, but if you continually buy all of them no matter the price, I’m going to stop offering because clearly you know something I don’t. But I can do all of that negotiation in seconds with HFT, so I can offer 10 shares at a time and still sell tens of thousands per day. But if my only choice is to offer one big block of shares per day, then there’s a huge risk that I’ll lose money on that trade and I need to increase the bid/ask spread to stay in business.