Author Topic: Q: Why do we need millisecond stock updates?  (Read 6442 times)

nereo

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Q: Why do we need millisecond stock updates?
« on: February 05, 2016, 06:33:16 AM »
Serious question that arose from a discussion about millisecond advantages in trading stocks.

I understand that a stock's price is based on the very last trade, and that each trade can move a stock's price up or down.  What I'm wondering is why we need this millisecond-level precision.  Hypothetically, could we set up a market so that shares were traded in discrete blocks of time?  For example, buy/sell orders could be executed ever 5 seconds starting at 9:30.00.  Trading would still be 'nearly' instantaneous but an actual human with a normal computer could look at the "ask/bid" price and decide yes/no.

Is there a reason why an exchange could NOT function this way?

capitalninja

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Re: Q: Why do we need millisecond stock updates?
« Reply #1 on: February 05, 2016, 06:42:37 AM »
Because this is part of the way that HFTs make their money. For investors (as defined by Ben Graham), millisecond or *gasp* even hourly updates are unnecessary.

Psychstache

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Re: Q: Why do we need millisecond stock updates?
« Reply #2 on: February 05, 2016, 06:47:28 AM »
Serious question that arose from a discussion about millisecond advantages in trading stocks.

I understand that a stock's price is based on the very last trade, and that each trade can move a stock's price up or down.  What I'm wondering is why we need this millisecond-level precision.  Hypothetically, could we set up a market so that shares were traded in discrete blocks of time?  For example, buy/sell orders could be executed ever 5 seconds starting at 9:30.00.  Trading would still be 'nearly' instantaneous but an actual human with a normal computer could look at the "ask/bid" price and decide yes/no.

Is there a reason why an exchange could NOT function this way?

Because it would not allow some people to make incredibly large amounts fo money via High Frequency Trading and other non-value adding techniques.

There are lots of things in many domains we could do to make the world and the country a more logical and functional place, but it isn't done because it would cut into the pocketbook of someone in the 0.02%

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #3 on: February 05, 2016, 06:47:52 AM »
Because this is part of the way that HFTs make their money. For investors (as defined by Ben Graham), millisecond or *gasp* even hourly updates are unnecessary.
That's what started the whole discussion.  What I'm asking here is whether an exchange could function with numerous discrete (instead of continuous) trading periods throughout the day.

NoStacheOhio

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Re: Q: Why do we need millisecond stock updates?
« Reply #4 on: February 05, 2016, 07:26:26 AM »
Because this is part of the way that HFTs make their money. For investors (as defined by Ben Graham), millisecond or *gasp* even hourly updates are unnecessary.
That's what started the whole discussion.  What I'm asking here is whether an exchange could function with numerous discrete (instead of continuous) trading periods throughout the day.

It's an oversimplification, but that's essentially what happens when you place an order on the open or close.

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #5 on: February 05, 2016, 07:34:14 AM »
Because this is part of the way that HFTs make their money. For investors (as defined by Ben Graham), millisecond or *gasp* even hourly updates are unnecessary.
That's what started the whole discussion.  What I'm asking here is whether an exchange could function with numerous discrete (instead of continuous) trading periods throughout the day.

It's an oversimplification, but that's essentially what happens when you place an order on the open or close.
My understanding was that traders were processed on a continuous basis, not at discrete intervals.  Is that not correct?  Otherwise, why would there by an advantage to having super-fast computers that could 'beat' others to a trade?

Rubic

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Re: Q: Why do we need millisecond stock updates?
« Reply #6 on: February 05, 2016, 07:34:57 AM »
Is there a reason why an exchange could NOT function this way?

Because that exchange would then be competing at a disadvantage to exchanges which offer faster transactions.  This race toward theoretical limits of data flow in stock trading adds no value to society, but it's a consequence of competition.  It really has no effect on the long-term investor.

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #7 on: February 05, 2016, 07:43:14 AM »
Is there a reason why an exchange could NOT function this way?

Because that exchange would then be competing at a disadvantage to exchanges which offer faster transactions.  This race toward theoretical limits of data flow in stock trading adds no value to society, but it's a consequence of competition.  It really has no effect on the long-term investor.

Ignoring stocks that are listed on more than one exchange, how could competition between exchanges matter for the listed company?  Would it somehow be 'better off' switching to a faster exchange?

I agree it has no effect on the long-term investor, but if it doesn't benefit the listed companies either...

Jack

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Re: Q: Why do we need millisecond stock updates?
« Reply #8 on: February 05, 2016, 07:59:49 AM »
My understanding was that traders were processed on a continuous basis, not at discrete intervals.  Is that not correct?  Otherwise, why would there by an advantage to having super-fast computers that could 'beat' others to a trade?

In computing, there's no such thing as "continuous." Instead, the intervals are discrete, but very very small. (At the limit, the interval could be small enough to contain only one trade.) Slow computers (or more precisely, computers with higher-latency connections) lose because they miss their intended interval n entirely and instead execute their trade on interval n+1 (or n+5000).

As for why the intervals are small instead of large, the answer is that the high-frequency traders have the money and power to dictate the design of the system, to their advantage -- it's a totally corrupt good-ole'-boys club. Is this a surprise to anyone?

AlanStache

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Re: Q: Why do we need millisecond stock updates?
« Reply #9 on: February 05, 2016, 08:01:46 AM »
Milliseconds are discrete.

Way back when we used analog electronic computers, but that was a long time ago. 

Mutual funds 'trade' on a daily basis.  So yes for mom and pop there is no need to get into small units of discrete time. 

But it is an interesting question, what effect would there be on JNJ if it could only be traded at 5 minute intervals. 

I have not read as much as I would like on HFT.  I think the idea of the exchanges is to execute orders as they come in not to wait till the end of some time span then match up sellers and buyers - the goal is to match buyers and sellers 'continuously'.

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #10 on: February 05, 2016, 08:14:16 AM »
My understanding was that traders were processed on a continuous basis, not at discrete intervals.  Is that not correct?  Otherwise, why would there by an advantage to having super-fast computers that could 'beat' others to a trade?

In computing, there's no such thing as "continuous." Instead, the intervals are discrete, but very very small. (At the limit, the interval could be small enough to contain only one trade.) Slow computers (or more precisely, computers with higher-latency connections) lose because they miss their intended interval n entirely and instead execute their trade on interval n+1 (or n+5000).
Ok - point taken about milliseconds not being truly discrete.  We do seem to be going towards ever smaller increments of time though.

Quote
As for why the intervals are small instead of large, the answer is that the high-frequency traders have the money and power to dictate the design of the system, to their advantage -- it's a totally corrupt good-ole'-boys club. Is this a surprise to anyone?
I understand that this makes a (very powerful) mechanism to resist any change, but my real question is whether there is a technical reason to prevent an exchange from operating on much larger increments.  AS for it being a corrupt good-ole-boys club... yes, that might keep anything from ever changing, but I do wonder i there isn't inertia there for change; HFT aren't competing much with individual traders, but with each other.  It's become an arms race where each tries to have the fastest computers and the shortest FO runs.  If trading were switched to 5s incriments then everyone could say "ok, there's no advantage to having the best hardware... now it goes to information and analysis".
Stock cars vs F1?

AlanStache

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Re: Q: Why do we need millisecond stock updates?
« Reply #11 on: February 05, 2016, 08:53:18 AM »
...
I understand that this makes a (very powerful) mechanism to resist any change, but my real question is whether there is a technical reason to prevent an exchange from operating on much larger increments.  AS for it being a corrupt good-ole-boys club... yes, that might keep anything from ever changing, but I do wonder i there isn't inertia there for change; HFT aren't competing much with individual traders, but with each other.  It's become an arms race where each tries to have the fastest computers and the shortest FO runs.  If trading were switched to 5s incriments then everyone could say "ok, there's no advantage to having the best hardware... now it goes to information and analysis".
Stock cars vs F1?

Not technical but I would expect the spread of prices offed for buys and sells to increase as the time step grew.  If JNJ sold for 100.43$ 1/1000 of a second ago it is probably still worth about that much now, but if it sold for 100.43$ an hour ago what is it worth now- there will be a wider range of opinions?  I think this would complicate market orders.

Eric

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Re: Q: Why do we need millisecond stock updates?
« Reply #12 on: February 05, 2016, 10:07:04 AM »
And how would this be accomplished?  By government order?  What are you, communist?  Why do you hate America and the free market?

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #13 on: February 05, 2016, 11:14:58 AM »
And how would this be accomplished?  By government order?  What are you, communist?  Why do you hate America and the free market?
Let's just deal with the first one.  I imagine an exchange could simply make the change themselves.  For example, the NYSE could simply decide that from some point forward all orders would be executed every 2 seconds rather than every 0.001 seconds. 
Presumably this could actual lower costs by reducing the processing power of all the computers that handle trades, and perhaps even allow for better circuit breakers.  They would still collect the fees for the company to be listed on the exchange, but might loose some revenue from trades.  As I understand it though, trade volume overall has been going down steadily anyhow.

povertystrickenbastard

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Re: Q: Why do we need millisecond stock updates?
« Reply #14 on: February 05, 2016, 12:18:01 PM »
As I understand it though, trade volume overall has been going down steadily anyhow.

So how much of a problem really is HFT if trade volumes are headed down?

JetBlast

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Re: Q: Why do we need millisecond stock updates?
« Reply #15 on: February 05, 2016, 12:19:05 PM »
nereo, if you haven't already, you should read Flash Boys by Michael Lewis. It's a good read and addresses much of the controversy regarding high frequency trading.

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Re: Q: Why do we need millisecond stock updates?
« Reply #16 on: February 05, 2016, 12:25:32 PM »
nereo, if you haven't already, you should read Flash Boys by Michael Lewis. It's a good read and addresses much of the controversy regarding high frequency trading.

+1 I find this book highly enjoyable. 
He mentions the invention of "fair exchanges" which are designed to prevent HFT from profiting.
IIRC, the market share of the fair exchange is negligible compared to the big ones like NYSE.

Adventine

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Re: Q: Why do we need millisecond stock updates?
« Reply #17 on: February 05, 2016, 01:05:43 PM »
nereo, if you haven't already, you should read Flash Boys by Michael Lewis. It's a good read and addresses much of the controversy regarding high frequency trading.

+1 I find this book highly enjoyable. 
He mentions the invention of "fair exchanges" which are designed to prevent HFT from profiting.
IIRC, the market share of the fair exchange is negligible compared to the big ones like NYSE.

+2. Flash Boys has a lot of information on HFT and the birth of IEX, which aims to be a "fair" exchange for buyers and sellers. It's been growing steadily. Last I heard, IEX was applying for some US certification to become a mainstream exchange. Can't find the exact link right now, but you should be able to find it on Bloomberg.com.

Doubleh

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Re: Q: Why do we need millisecond stock updates?
« Reply #18 on: February 05, 2016, 02:22:45 PM »
No technical reason why it couldn't be don't - in fact that's exactly the solution suggested by Tim Harford in a recent financial times article:

http://timharford.com/2016/01/how-fighting-for-a-prize-knocks-down-its-value/

MustacheAndaHalf

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Re: Q: Why do we need millisecond stock updates?
« Reply #19 on: February 05, 2016, 02:57:12 PM »
I've read two books about High Frequency Trading (HFT): "Dark Pools" and "Flash Boys".  If you want technical details, Dark Pools have more of them.  For a more accessible story, Flash Boys is better.  Note that HFT trade with everyone - they want to take advantage of individual investors, retirement funds, and each other.  They are not interested in skipping a profit wherever it can be made.

There's also another issue: 5 second intervals for who?  If a HFT gets data before you do, they can make an end run around your trade.  They can spot your incoming trade and effectively become a middle man by buying what you're buying, then selling it to you as your trade arrives.  That's why HFT kept getting closer to the stock exchange, and building more expensive infrastructure to cross the Atlantic - to run ahead of other people's information.

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #20 on: February 06, 2016, 07:49:06 AM »
Thanks for the suggestions about Flash Boys - I'll check it out next time i'm at the Library.
As I see it, HFT is just one reaction to this tendancy towards every-fasting trading increments.  I suppose an interesting parallel question is: What value does millisecond stock updates bring to the publicly trading companies and to society in general? 
It seems that it can create an uneven playing field via HFT (bad).  Does it do any good?

CoderNate

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Re: Q: Why do we need millisecond stock updates?
« Reply #21 on: February 06, 2016, 08:26:28 AM »
1. Research dollars for network optimization and real-time computing
2. Faster trades means better price finding and liquidity, which will tend to lower the bid/ask spread
3. If you want to get in or out of a position immediately with a market order, you will have a much better idea of what the price will be than if you are at the mercy of an hour of others' trades

YoungInvestor

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Re: Q: Why do we need millisecond stock updates?
« Reply #22 on: February 06, 2016, 08:42:59 AM »
Thanks for the suggestions about Flash Boys - I'll check it out next time i'm at the Library.
As I see it, HFT is just one reaction to this tendancy towards every-fasting trading increments.  I suppose an interesting parallel question is: What value does millisecond stock updates bring to the publicly trading companies and to society in general? 
It seems that it can create an uneven playing field via HFT (bad).  Does it do any good?

It reduces the spread... As another poster mentioned, if stocks were trading every 5 minutes instead of almost continuously as they are now, the bid/ask would likely be much further away.

This would complicate the system to solve a problem that is on its way out anyway.

nobodyspecial

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Re: Q: Why do we need millisecond stock updates?
« Reply #23 on: February 06, 2016, 09:36:54 AM »

Ignoring stocks that are listed on more than one exchange, how could competition between exchanges matter for the listed company?  Would it somehow be 'better off' switching to a faster exchange?
Many companies might want to switch to a slower exchange - or one that didn't allow HFT
It can't be easy to be the CEO of a company and know that however hard your employees work and however smart your executives are - the
"value" of your company is set by who can front run an order between London and Frankfurt 0.1ms faster than somebody else

matchewed

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Re: Q: Why do we need millisecond stock updates?
« Reply #24 on: February 06, 2016, 09:45:44 AM »
Thanks for the suggestions about Flash Boys - I'll check it out next time i'm at the Library.
As I see it, HFT is just one reaction to this tendancy towards every-fasting trading increments.  I suppose an interesting parallel question is: What value does millisecond stock updates bring to the publicly trading companies and to society in general? 
It seems that it can create an uneven playing field via HFT (bad).  Does it do any good?

Probably not much regarding value to society in general.

It probably doesn't do much bad either from my understanding. Whether it is in milliseconds, seconds, minutes, or hours people have been trying to do this same thing time and time again with the stock market. They buy at a price and sell at a higher price. It's just automated to be much faster this time around. I don't really see anything bad about it except for the possibility of a poorly written algorithm running amok.

nereo

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Re: Q: Why do we need millisecond stock updates?
« Reply #25 on: February 06, 2016, 06:28:45 PM »
Thanks for the suggestions about Flash Boys - I'll check it out next time i'm at the Library.
As I see it, HFT is just one reaction to this tendancy towards every-fasting trading increments.  I suppose an interesting parallel question is: What value does millisecond stock updates bring to the publicly trading companies and to society in general? 
It seems that it can create an uneven playing field via HFT (bad).  Does it do any good?

It reduces the spread... As another poster mentioned, if stocks were trading every 5 minutes instead of almost continuously as they are now, the bid/ask would likely be much further away.

This would complicate the system to solve a problem that is on its way out anyway.
Sure, but I was thinking more about ~1 second intervals, not 5 minutes.  It's hard for me to believe that the bid/ask would change much in that time period.

Anyhow - htis was all just a hypothetical question that's been bugging me. Thanks all who participated.

nobodyspecial

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Re: Q: Why do we need millisecond stock updates?
« Reply #26 on: February 06, 2016, 06:39:03 PM »
Isn't it purely rent seeking ?
You try to buy a stock and somebody sees your order, nips in and buys it, then sells it to you for a small mark-up

MustacheAndaHalf

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Re: Q: Why do we need millisecond stock updates?
« Reply #27 on: February 07, 2016, 11:53:31 AM »
Something like Vanguard S&P 500 ETF ("VOO") trades very quickly in high volume.  But there are stocks and ETFs that are barely traded at all, that will literally take minutes to execute a large trade.  The original solution was for a "market maker" to keep an inventory.  You sold to the market maker, and hopefully later someone else bought from the market maker.  Because they take a risk, they charge a spread between buyer and seller.

HFT would argue they provide liquidity (which is what they've said to Congress when justifying their existence).  For me, seeing $0.01 variation in an ETF priced at $100.00/share isn't that interesting.  If HFT wants $1 for every $10,000 I invest and hold, I can focus on other things first.  I suspect the volatility and front-running are not needed, but do not detract enough to matter (at least for me).

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Re: Q: Why do we need millisecond stock updates?
« Reply #28 on: February 07, 2016, 04:36:17 PM »
I agree that technically there is no reason to allow realtime trading, and it could easily be chopped up into discrete blocks.

However, I would like to add the technical point that if you discretize the trades, you also have to discretize the availability of information about those trades. If I can know within a nanosecond about someone elses trade, which willl be executed in one minute, I can still play the HFT game. The game will go on nanosecond by nanosecond until everything finally clears at the end and the person who put in the big order gets ripped off, or some poor sap who leveraged his trade gets margin called.

The situation would improve if the trading computer was a sealed black box that only accepted incoming encrypted trades and outputted trade results. In that way, the information used to play the game would only be available in increments, presuming that the person running the black box is honest. However, in finance and software, honesty is impossible to prove and likely nowhere to be found when you get down to brass tacks.

So therein lies the problem: You probably can't ban HFT because its very likely that you can't actually enforce the ban. Trying to ban it would open up a gigantic golden opportunity for some courageous coders, and insiders to make huge profits by cheating the ban.

faramund

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Re: Q: Why do we need millisecond stock updates?
« Reply #29 on: February 07, 2016, 10:17:38 PM »
I get paid each fortnight, so once a fortnight I update my finances, log on to the share market and buy my next intended parcel of shares.

From my point of view, I probably am better off with HFTing existing, because when I want to buy a stock, I assume it means that it will be available for me, and with less of a spread, then would otherwise be the case.

Maybe, (I'm just looking at a stock now on the Australian exchange (NAB if anyone cares), its buy/sell spread is 26.14/26.17, so let's say at worse HFTing means I pay 0.03/26.14 = 0.11% more than I should ... who cares, after 2 years, that'll lower my average profit per year by 0.05%, in 10 years by 0.01%, and of course, it matters less and less the more, and more years I hold it for.

Now I understand that people who try to do buy-and-sell strategies would care more about this than a buy-and-hold person, but either the buy-and-sell person is

a) one of the few god-like people who can beat the stock market - in which case, they really shouldn't care about this, or

b) their part of the great mass of people who would be better off buying index funds - in which case, just buy an index fund!