> There is an extremely high probability NYSE TX remains in Mahwah
> I wish one of these venues would have the conviction to put their whole kit in Dallas
To be fair, few people actually host in Mahwah or Carteret anymore. The HFT game is essentially closed, as the price of entry in terms of knowledge and capital is too high.
Most people just prefer a comfy Equinix DC with all modern amenities, where NYSE, Nasdaq and all other markets & brokers have a latency-stable point of presence, such as NY4.
You did raise a good point about latency sensitive brokers, and I feel like that is becoming a self-selecting cartel based around the NY/NJ area. So when you have these folks talking about moving to places like Houston or Dallas, in an implied or entailed way they are talking about breaking that latency cartel. Honestly, just by stupid personal opinion, the SEC should grow the courage to ban low-latency based trading. This topic has been beat to death over the years, so I'm not adding anything to the discussion, just chiming in to say the obvious things... have a nice day.
Just for the record, the latency arb / microwave networks speed game is basically dead as of 2018-2021. Looks at Virtu, formerly classic examples of the trade and now almost entirely "switched sides" and doing order execution services for the same big banks whose lunch they were formerly eating.
Furthermore, the wireless stuff is commoditized at this point. You can just rent to be on the wireless that Apsara (et al) offer, and while some have private networks, there's not enough money left in the trade (see above) to be worth it if you don't already have one.
This is combined with liquidity moving away from public exchanges (both the lits and darks) towards being matched internally/by a partner (PFOF matching), which is purely a win for retail traders and is its own force that isn't going away. (Go on robinhood and buy 2 shares of SPY. It fills instantly. People love that. You can't just go get 2 shares of SPY off the lits, so where dyou think those are coming from?)
Traditional HFT is dead. The only extent any of the firms are still alive is the extent to which they've moved on to other trades, many of which are so much less latency sensitive that the microwave edge doesn't really give you enough alpha to be worth it.
(I worked for a firm for a long time that didnt move on to other trades... so I'm quite familiar with the scene.)
Exchange trading happens in round lots that are usually 100 shares.
This is pretty much just a legacy thing, but so many technical systems have this assumption built in that while odd-lot trading (trades not in the round lot size) has become a little more common on the exchanges, it’s still treated weirdly by the various systems involved.
But also, it’s better for you as a retail investor, to get them from a middleman, because they will generally give you a better price than the exchange. They will give you a better price because retail traders tend on average to be worse at trading than the overall market. You should take advantage of that, regardless of your actual ability level.
Odd lots don't contribute to the NBBO, and placing an order for an odd lot doesn't have to execute within the NBBO. (People can trade "past" you, I am pretty sure ISO's don't need to clear you, etc). (Note these are rules for market participants, not retail customers). So for a firm trying to argue they provide excellent price improvement and execution efficiency for their customers, they can't "just" send the orders to the lits.
And even if they could "just" do so, internal matching typically provides better price improvement on the NBBO than even the best execution you could get off the lits.
Edit: But yes TBC, you're correct that odd lot trades aren't unusual. But you're seeing trades there by actual market participants, not retail orders. They're not just trying to get those 2 shares, there's a broader strategy and they're aware of all the above nitty gritty.
In example 3, the NBBO for stock ABC is 495--500, but there is also an odd lot offer for 497 on exchange. If a Robinhood customer sends a market buy order, then Citadel is allowed to fill it for 499.999 even though it's better to send to the exchange. (And if they then pick up the odd lot themselves, it's easy arbitrage.)
By the way, while you're correct about some of your claims, odd lot executions definitely have to occur within the NBBO. (How could it be otherwise?) Otherwise, in the example above, Citadel would give an even worse price!
I mostly mean scenarios where your limit order might not be marketable, end up resting on the book, and then get traded "through". I'm speaking from the perspective of an actual direct market participant, where you're not using a market order but are trying to enter a position while adding liquidity/collecting a rebate. (Most exchanges reward participants who have some % of their trades as liquidity-added, with rebate tiers).
Round lots are excluded from the NBBO so that the NBBO can't be as easily influenced by quantities of shares that don't represent any material price signal. 1 share of practically anything but BRK class A represents ~nothing. Less than a round lot on a price level is basically no liquidity available at that level.
There are per ticker rules to allow odd lots on most US markets. AFAIK unless you're trading penny stocks, every stock out there is entitled for odd lots, and most trades are indeed odd lots, that has been the case for 10 years at least.
Even if there wasn't, I guess at least half the trading on stocks is through CFDs and not cash, so lots aren't even a thing for most investors.
In the current political environment, I don't see SEC (or any other gov't agency) growing courage anytime soon. Well, other than DOGE acting like an energy vampire growing stronger off of its victims.
> Honestly, just by stupid personal opinion, the SEC should grow the courage to ban low-latency based trading.
I think that's really just a matter of the media giving bad press to HFTs "because it's scary". The boring reality is that not much people care, and HFTs are really not that important on the grand scale of things. We're talking about maybe 4/5 firms worldwide making single to low double digits billions in P&L, from an activity that is most likely overall positive, or say net 0 if you're a bit cynical. Good for them.
Honestly, that's not even a peanut compared to what more typical finance institutions manage and earn.
Your typical institutional investor (pension funds, insurance company, fund of fund, bank, etc) manages in the 100s to 1000 billions. Each.
The whole HFT industry probably makes what a single institutional investor earns by buying US debt at 1%.
The HFT industry really is just a small microcosm, it just so happens that it triggers dreams and fantaisies in the public mind.
> If low latency trading was banned real humans could compete for that money.
But that's what we had before, and was it better ? I don't think having 1000s of trader monkeys buying and selling while refreshing their price feeds or shouting in a pit is any better.
At the end of the day, as long as there will be market inefficiencies, there will be arbitragers. I don't see the point of kicking those arbitraging at 1us to replace them with people arbitraging at 1s or 1m.
For a while at least HFC was able to pay a lot of money to some really smart people to do some really weird high performance computing projects. Sure to the industry the amount of money they has wasn't even a peanut, but to a normal person on the street it was still a lot of money, and even to the financial industry it was still worth (for a while) paying high salaries to the very best for that fraction of a peanut.
> HFT & payment for order flow is what has made stock trading the low fee environment it is today.
I get how payment for order flow would help enable this current low upfront fee trading system we have today, they're managing to get their money from places other than direct fees. I don't exactly get how HFT also makes it low cost. Could you further explain that? Is it that mostly the people paying for the order flow is pretty much exclusively HFTs, and if they didn't exist the order flow market wouldn't exist?
Making up numbers here, if the HFTs manage to squeeze a dollar of profit out of the order flow data after buying my trade data for a dollar (two dollars of spread they manage to find), is that really better than me paying a dollar or two in fees for that order? It would be interesting to see the real values in question here on such things to actually gauge what is better for an average trader now trading in the low to zero fee trade market.
Spreads on bid/ask used to literally be at least 25cents, they didn't even use decimals. Would you rather pay 1 guy in a funny jacket with a palm pilot in NY 25 penny or a bunch of computer nerds sniping each other 1 penny?
Let's say you buy $10k of some $50 stock today and decide to sell tomorrow.
In the old days you'd have paid say $10 to your broker to buy, and $10 again to sell. Your bid-ask spread in isolation of any price changes in the stock would be 25cents per share x ($10k / $50 = 200 shares) = another $50 in spread. So you're all-in transaction costs would have been $70.
Now you probably have a no-fee brokerage, and generally a penny spread.
So same formula is 1cent per share x (200 shares) = $2 in spread + $0 in fees. So you're all-in transaction costs would be $2.
$2 vs $70 on $10k round trip investment. 2bps vs 70bps.
> I don't exactly get how HFT also makes it low cost
Because most HFT firms are also market makers. You can see them basically as middlemen that are mandated by the exchange to provide liquidity on both bid and ask by the market. These liquidity mandates reduce the spread for other traders, and in exchange market makers have lower, or even positive fees (i.e. they are _paid_ to trade).
Usually, market makers use these rebates to earn money by taking a passive order risk on behalf of an aggressive order from a flow they bought.
Think of it that way:
You're an exchange, you want people to trade on your platform, that's how you earn money.
For people to trade on your platform, you need liquidity, actual shares to buy and sell. So you invite market makers on your platform, and sign a contract with them, along the lines of "you have 0 trading fee but in exchange you need to provide $X of liquidity on bid and ask at any time and ensure a spread <Ybps".
Market makers accepting to on-board now have to somehow make a living while providing liquidity, but this is a risky business, because they are basically market making for people that are _more_ informed than them (they have adverse selection by design), and they have to respect their mandate of providing liquidity. That is, if a stock goes down, and people start selling it, the market maker still need to provide liquidity for sellers and buyers, which means maybe he will have to actually buy these shares that are tanking.
Usually the pure market making mandate is close to 0 profit, unless you spice it up with some other strategy. Taking passive order risk, netting order flow, maybe short term technical alpha, etc.
You can think of market makers and HFT basically as the same people. If you trade at high frequency, you're playing on micro changes in price, there's only so much a stock price can realistically move in 1s. HFT is only viable if you have very low, or no transaction cost. That's why there's a natural overlap between HFTs and MM.
And as a refresher for why HFT exists - it's a side effect of RegNMS. RegNMS exists because the guys in funny jackets in NY with palm pilots were ripping people off.
There was no consolidated tape and obligation for exchanges to route your order for Best Execution. There was no National Best Bid Best Offer.
There was just whatever price the exchange your broker sent your order to filled you at.
Some exchanges cough NASDAQ cough used to do things like display sub-penny quotes even though they only filled at full penny increments. So they could attract flow advertising prices they wouldn't file you at. See Rule 612.
No sure why this got downvoted, and I'm not sure what else people think "humans competing for that money" would look like?
You're gonna need to physically collocate those people if you are trying to ban computers and latency based trading. Possibly in a "Pit" maybe in a building called an "Exchange" in places with a lot of financial services people like say NY or Chicago. Probably need to have some sort of membership/license requirement due to finite space. I dunno. Sounds like a novel concept that's never been tried.
Before the internet? Things are a bit different now. HFT monopolized the market maker/arbitrage money with millisecond executions that nobody can compete with.
You said "If low latency trading was banned real humans could compete for that money."
As soon as you re-introduce distance, latency becomes a factor again. How do you eliminate "low latency trading" and prioritize "real humans" without putting them in the same room?
What do you actually propose here?
One way to reduce the impact of latency is to do away with continuous trading and move to frequent but discrete auctions. But this would just increase volatility.
Imagine if every X minutes / hours stocks moved Y% like they do at market open, as all the information that was disseminated since the last auction was re-priced in.
If anything the long term trend has been towards longer continuous trading sessions to reduce those types of jumps.
I've wondered if introducing a small but omnipresent random delay in all trading requests might suffice. Something like 0-100 milliseconds. Just enough to moderate some of the advantage that physically co-located automated traders have, while not outright banning it.
Can you not use this information of it being closed for high frequency trading?
Also I have pondered, to put it very simply, why wouldn't it be profitable, since the markets fluctuate, to gamble small amounts constantly at where they most often (this is more complex but you could simply draw line as well) cross a line, such that you can always lose everything, and then sell every time it goes over that line & buy when it's below regardless of how much you would make?
If we model the stock market as a random walk/Weiner process and I got the math right, I think you're almost certainly going to make money (if you stop when you reach a given profit threshold), but you will have arbitrarily large drawdowns. This is similar in terms of the risk/return profile to the martingale betting system. https://en.wikipedia.org/wiki/Martingale_(betting_system)
Oh yeah, I think in my head I confuse the size of the bet with the size of the ranges where it could be claimed to frequently cross the line between sell or buy (which I proposed would be what is most frequently crossed over), but in normal stock markets the market never hits the bottom. Compare this – real markets – to discrete signal between in [0.00,5.00] with smallest change being 0.25, and the market frequently going to zero or near zero, where know it often goes from [0.00, 1.75] to [2.25, 5.00]. In such case you wouldn't lose as heavily. So then markets can be roughly & informally modeled as what's the relationship between how much it somehow "often" changes vs. what's the risk cost, e.g. since normally stocks don't drop to zero constantly what's the bottom part in the traditional market graph that stays the same (it doesn't seem trivial to me what's the best way to consider what's often and what's the bottom part as the bottom part may change over time even if it most of time in real world remains constant, but I think the idea doesn't need one to know the exact alforhitm as yet to speak of values that if often crosses.
So what, then is the exact information value of these candy bars of when the stock has not changed value? What do they tell us? And moreover, are they consistently valued, since the primary tail risk seems to be (probably, I am not expert) market crash, which means one would expect each to have the unchanging candy bar to relative to future performance, so that if we have a reasonable assumption of market crash probability, then some pattern should emerge & things should make sense?
I believe it's trivial to formalize this point & honestly fruitless to not to figure it out, but I will post this comment & perhaps later on return to this. To me the primary here is that the candy bar is what matters, and that if any markets like my [0.00, 5.00] market exist, my strategy would be profitable in those.
Moreover, I think in trading strategy the idea that one wants to guess how fast they can cross the threshold to not to lose, to be able to "Martingale" as you out it is valuable & kellyable.
For clarity, I don't consider anything mentioned even practically feasible or relevant.
I mentally tripped over by forgetting that if stock costs 500 + [0,10] (where it fluctuates) normally, you must in order to participate even without any fees pay 500 + [0,10] and not just the [0,10].
> I wish one of these venues would have the conviction to put their whole kit in Dallas
To be fair, few people actually host in Mahwah or Carteret anymore. The HFT game is essentially closed, as the price of entry in terms of knowledge and capital is too high.
Most people just prefer a comfy Equinix DC with all modern amenities, where NYSE, Nasdaq and all other markets & brokers have a latency-stable point of presence, such as NY4.