Discussion in 'Automated Trading' started by steeldust, Jan 16, 2011.
Scary though- the new strategy of syncing all their trades in different markets is good, but the consequences of the arms race in HFT leads to situations where trading can only be done during "perfect markets". Any other time the illiquidity will lead to more illiquidity and large traders will pull away from the market.
In other words, the best of new technology will create large holes in the market which will only be filled by players who wait until an intervention to post Market orders.
Its not really a solution. Its like saying we found a way not to run out of water in the desert- we make sure we all drink at the same time...which is fine until you all run out of water.
Erm, this article makes it look as this is some sort of a new development, which it most certainly ain't. This arms race has been going on for years now.
As I interpret the article, it says the following:
For simplicity's sake, we will assume there are only two exchanges with their unique orderbooks. One is the ARCA, the other is NSDQ.
Let's just look at the offer side.
50.10 500 x ARCA 300 X BATS
50.11 500 x ARCA 100 X BATS
50.12 500 x ARCA 100 X BATS
50.13 500 x ARCA 200 X BATS
50.14 500 x ARCA 200 X BATS
50.15 500 x ARCA 200 X BATS
Mutual Fund Garbage Management wants to buy 2000 shares of XYX up through 50.12. They use a smart router which checks ARCA first.
Let's assume it takes BATS 10ms to receive an order when it is sent from Garbage Management and 5MS for ARCA.
Someone sends a smart order, which goes to bats, and buys the 1500 shares available through 50.12. However, the collocated HFT box is able to see that someone swept 3 levels of shares on ARCA, and knowing it will take another 5ms before the highly probably incoming BATS buy order comes in, it cancels the offers. Consequentially, the mutual fund only received a fill of 1500 shares instead of the full 2000. It must now pay an extra penny and buy up to the 50.13 level if it wants to fill its order.
If I understand correctly, this article is staying that this new "SMART" router would send the order to BATS, wait 5ms, and then send the order to ARCA, so both exchanges receive the orders at the same time, disallowing collocated boxes from canceling based on exchange-latency arbitrage.
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