Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis’s “Flash Boys” spurred an outcry last year, is diving back in. http://finance.yahoo.com/news/goldman-sachs-revs-high-speed-090000422.html?l=1
Cancellation fees would make all of this bullshit just go away. The trouble is the exchanges are all in on it. They'll make exemptions for "market makers" and regulatory isn't doinf squat either (I wonder why). The average investor, hell even the average trader, is not going to be significantly affected by cancellation fees either.
Cancellation fees wouldn't really work as spread traders (that provide a lot of needed liquidity to the markets) use autospreaders to quote spread prices to the market. Theyre constantly adjusting their bids and offers away from market and are certainly not high frequency or manipulative but to move or cancel their orders constantly
This is specifically for synthetic spreading only though. Exchange traded spreads wouldn't have this issue whatsoever. At a certain point what's the bigger problem? The HFT in general or protecting auto spreaders? I mean I definitely hear you on this concern. On the same token I know that simply instrumenting a token cancellation fee would completely destroy all HFT strategies - which in essence are purely gimmicky and parasitic trading methods.
I am saying that we shouldn't throw the baby out with the bath water. Synthetic spreading is a huge part of the liquidity provided in the market. Very very few of the orders in the market are just people putting an order it at a level and waiting for a fill. Over regulation is sucking liquidity out of the markets. As soon as there is a market shock and there will be one (possibly even started in the bond market) and nobody is the other side of the market it will have very real consequences to the real economy. I am against anything that doesn't make it a level playing field and for that reason I am against HFT. My point is cancellation fees would not be the right way to go. If you put an order into the market it is there to be traded no matter how long it is left there. Nothing wrong with that. My issue is the fact a select few market players get access to prices and orders faster than everyone else. I'd personally rather see some sort of speed control on exchanges where connections to the exchange in terms of order speed/price feed/news release speed etc was made more equal.
Yea in the current environment that's most likely how it is. That's not to say we could apply that current context equally if there were more penalty for fleeting orders and more reward for waiting/less parasitic behavior. Let's go back to 2001 or so where HFT was not nearly as widespread. I wasn't trading futures then but surely the liquidity could not have been so bad that the popular products were illiquid or untradable. Completely agreed - but do you believe HFT will actually be making a significant portion of this liquidity in the event of a significant market shock? The problem here is this is technically impossible to do IMO. There's no way one can systematically guarantee that every trader receives current tape and quote at exactly the same time. Some of the time windowing discussions where each trading interval is broken into discrete 100-500ms ranges *might* help with this but it might just shift the action into something that's simply just quantized. The same entities who have the fastest speed will either be able to react quickest to the last interval or conversely react the latest to the last interval. Aside from all that even if we were to ignore physics and pretend everyone got quotes at the exact same time it would then be an arms race as to who could process it the fastest (and said arm race already exists). This is why I argue that anything involving who can be the fastest or gaming time in some way ultimately results in the same problem. There's no reward given to non-toxic behavior. HFTs are free to engage in toxic behavior at zero cost while everyone has to suffer through it.
I totally agree with you about the 2001 market scenario. I started trading professionally in 2005 and the markets were a lot fairer back then without doubt and the markets did a lot more volume. But I really don't see how we could ever go back to those days because it wasn't just manipulation (assuming HFT is manipulation) it was the fact technology wasn't as advanced. Humans did the jobs of computers and were generally slower and less efficient. When a news release came out there was 30 seconds whilst we all worked out what it meant for the market. Not just an algo plugged into Bloomberg that read it in a micro second. If you were a spreader you worked out the spread price in your head which most ppl couldn't be bothered to do so spreads stayed in a tighter range and markets stayed organised. If a big buyer came into the market they didn't use algos to execute the order, they left a huge footprint in the order book. But those days are gone ,stopping HFT wouldn't take it back to those days it would require a reversal in technology which would be impossible to do. I would love to see a change but I don't think anything suggested so far would be a solution...unless trading went back on the floor but that's was fraught with corruption and inefficiencies too. Regarding HFT pulling orders in a fast market they do but true spreaders (using autospreaders) are very active during fast markets. I quote very aggressively in fast markets. It's a tough question for sure. But everything the authorities are doing are killing off true speculators in the market which will actually lead to more manipulation and more freak moves
I posted this in another thread but it is relevent here also: Am I missing something or am I the only one who sees this: Isn't all this HFT Proprietary trading (as opposed to execution) that accounts for such a percentage of the market volume dependent on gearing up (and thus low interest rate sand loose credit) to get a viable RoE?
A less intrusive way to keep HFT in check is to add a new type of limit order that cannot be cancelled in under 5 seconds. Lets call the new order type market making limit orders, which would jump ahead in the limit order queue of any regular limit orders at the same price. The SEC also urgently needs to outlaw sub-penny orders (currently only permitted by off-exchange market makers) and require all orders to either be provided a 1 cent price improvement or be routed to the primary exchange. Otherwise there is no incentive for any genuine liquidity providers to offer stable limit orders on the exchange.