If all trades are executing at the same time, what do you gain by knowing prices at finer intervals than that? The things you are hedging against would operate the same way.
Currently you can implement "Enter this position in an amount proportional to the portion of that order/those orders that get filled/do not get filled" yourself. You send the first order, you receive the response in a small amount of time, and then you send the order for the hedge. Alternately, you send the order and a hedge of a guessed size concurrently, wait for the order's response, and then adjust the hedge. Five minute or half-hour round-trip times would not be acceptable regardless, so a proposal that seeks to be taken seriously should address this issue.
Some thoughts on addressing the issue: implementing this sort of thing entirely on the server side would be a colossal engineering effort, and probably involve adding new "fill conditioned on state of other order (on a different exchange in a different country)" order types. A naive implementation of these conditional orders as described permits causal cycles where taking the shares causes one to take the shares, and not taking them causes one not to, and then one wonders whether the exchanges (the many worldwide exchanges that are collaborating on this algorithm) should have the order take the shares or not! A similar causal cycle may occur in which taking some shares causes one not to take the shares and vice versa. Regardless of what resolution is chosen for the "paradoxical" case, it will undoubtedly be a significant undertaking for both mathematicians and bakers to discern the correct combination of order types to maximize EV or to minimize risk, and to choose between maximizing EV and minimizing risk each time a position involving more than one instrument is traded.
Alternately, we could allow each exchange to make its own rules. They might end up with rules that are actually possible for human engineers to implement, like "price-time priority".
I meant in particular, it is not okay to have a one hour round trip time between the legs of a single position.
If I want to enter a large hedged position using the same "send some orders, wait for the fills, send more orders to tweak one side to be the appropriate size" procedure, I want to minimize the potential for price movement between the first and second sets of fills. If one hour's worth of information is incorporated into the securities' prices between the two sets of fills, that is a really huge amount of exposure compared to what I would expect today. I would have to be believe that the EV of the position is quite large before accepting one hour's unhedged exposure to get in on it. I could try to get rid of the round trip by using market orders everywhere, but this doesn't actually sound less risky. My belief and knowledge of the trades at some particular time would have to justify entering the position at some unknown pair of prices an hour later.
The great many participants who have not-incredibly-strong beliefs about the value of some hedged position will just not trade. The absence of their trades is a loss of information to the market; the market is less efficient. We probably share the belief that a more efficient market is good and a less efficient market is not so good :)
Enough with the hedged positions though!
Normally for this type of proposal I can just answer "If we do this then spreads will get bigger and that's bad," but here I have trouble doing that, because I'm not even sure if the notion of a spread or an inside price would make much sense once everything is so illiquid. Rather than having a view of the market that is a bunch of orders I can interact with at will, I would instead have a record of all the trades that happened in the last timestep and which orders were intact at the end of the last timestep. This is probably not sufficient information for me to learn the best prices at which I can be certain to buy or sell.
>If one hour's worth of information is incorporated into the securities' prices between the two sets of fills, that is a really huge amount of exposure compared to what I would expect today.
I don't think it's accurate to call what's going on today "an hour's worth of information." Not that much happens in an hour, per stock. It's more akin to an hour's worth of random walk. This is harder to argue, but I think this scheme would cause most of that random walk to disappear. Certainly whatever component of it is second order would disappear, (that is, based on signaling from the price movement itself.)
>I'm not even sure if the notion of a spread or an inside price would make much sense once everything is so illiquid.
If you think of liquidity in terms of "the chances that I can sell without having a large effect on the price of the stock" then I think this only increases liquidity. You're no longer counting on the availability of moment to moment orders on the other side of the deal. You're essentially building a smoothing function into the market.
There would be an incentive to wait for the very last moment to submit your order to such a system to maximize information for that period. However, this would be rarely useful for traders, unless there was some other automated thing, like a secondary market, that determined successful bids and asks.
