Freedinner - you have a lot of good ideas, but your model has a single point of failure. How many times have some technical glitch shut down some exchange for a few hours? If that happens across the close, all sorts of people will be unhappy. Multiple exchanges have their problems with fragmentation, but they are more redundant. Another issue with your bidding proceed is that it would be a de facto monopoly after the first round since all the other bidders wouldn't have a business with any profits to support them until the next round when they might win some business. So while it's likely to be competitive for the first round, it would quickly devolve into a monopoly or oligopoly amount those few firms that won a market in the first round.
MoreLeverage, these certainly are 2 valid points. I guess nothin's perfect... I personally believe that the benefits of a single order book outweigh the single point of failure risk, especially if you keep things simple (no gazillion order types with different rules, order forwarding to other exchanges based on outdated consolidated quote feed, quote stuffing etc). I dont hear much about exchange malfunctions in markets where single exchanges dominate, like ASX, SEHK, SBF etc. The large amount of disruptions you see almost daily in some US market might be itself be related to the huge complexities of the fragmented market where exchanges and large market participants constantly try to outgame each other by introducing new order types etc whose interplay is not sufficiently tested. The competitive speed chase compromises security and the stability of the system as each programming loop costs time and the reckless wins in the short term. Even though I'd auction the "single exchange right" per instrument and not for all 10K stocks to a single operator, I see your point on potential concentration. However, there are enough interested parties ( banks, buy side) that will quickly build a new exchange (with a simple market structure, barriers to entry are lower) if they felt that their execution costs are too high.
Very interesting read. Can someone please help me with some definitions: "When I quote the components I use ES as an alpha signal, but am really quoting something like AAPL @ one endpoint vs. its quotes at other endpoints." What is alpha signal? What is endpoints? Thanks
There are lots of literatures on applying Stochastic Control Theory to market making. Do you know firm that has successfully apply Stochastic Control Theory to market making?
HFT, when you say "most often you need at least a single related product", do you mean that most futures products cannot be scalped in isolation and only a select few can? Or do you mean that many of the futures products can be profitably scalped in isolation but the alpha that can be extracted is limited (compared to using another related product)? Although I understand that you don't focus on aggressive strategies (that require spread crossing), do you think that single (future) products can be scalped aggressively (as opposed to MM) in isolation? Another question, what would be a useful measure to quantify and optimized alpha? Is it common to use the information ratio or would it make more sense to use directional measures? Finally, do you think it is possible to meaningfully forecast larger mid movement at the order of 5-10 ticks?
hft To what extent do you guys use machine learning and AI in your systems vs using static rules? for example, earlier you mentioned comparisons between the bid and the ask size to forecast the next tick with a given level of accuracy. To what extend would you use a fixed interpretation (say, if the bid is 300% of the ask, then the tick must go up) vs using an ML algo to let the system figure that out on its own?
Most strategies requiring two related products... Interesting... Sounds like a complex combination of arbitrage and momentum trading. Kinda like detecting a anomalous spike down in a silver uptrend caused by a large order that doesn't occur in gold, and fading the silver spike because combined gold/silver upward momentum.
what do you mean with "your feed"? Are you a liquidity provider? And if yes on which platform/ECN? Thanks
that would never happen "naturally". Remember that the single reason why futures trading is centralized is REGULATION.