A regularly recurring theme at Red Planet Dust is the impact of IT-driven trends on decision-making and robosourcing, marketplaces and exchanges. “High Frequency Trading” is an exemplary example were technology is pushing aside human decision making, so called robosourcing, with all kinds of side effects (i.e. externalities) for society.
In Trading Faster Than The Speed Of Reality Michael Wellman of TechCrunch promotes the idea to introduce a 1 second discrete trading interval for securities trading:
High-frequency trading aggressively clears trades across exchanges, whereas the market sometimes performs better by letting orders accumulate for a while to better judge which ones should trade.
It might be in the nation’s best economic interest to eliminate this latency arms race. One way to do this would be to move to a system where all trades happen at discrete points in time — say once per second — rather than continuously. The interval is short enough so that markets can accurately track real-world events, but long enough so that shaving off tiny fractions of a second provides no significant advantage.
Our study showed that this market organization performs better by far than continuous trading. By placing a lower limit on time differences that matter for trading, we could create markets that can effectively keep up with even the fastest-moving world events, but no longer drive us to trade faster than reality itself.
Regular readers of Red Planet Dust by now know the tune: we as humans thrive though specialisation. Specialisation can only work in conjunction with exchange. “Exchanges” are a subset of “markets” which are part of our mechanisms to exchange.
The rise of markets is an important driver for the development of our economies/societies. (See John Hicks’ “A theory on Economic History”, Extended coverage on RPD post here .) In short hand: the better markets function in allocating resources and distributing value and risks the better for all.
The efficiency of exchanges has been a driver for our ability to collaborate; to balance supply and demand, to mitigate different risk profiles and future outlooks for the participants. The ability to have markets respond as quickly as possible to changing circumstances is part of markets becoming more efficient. It now seems that we have to nuance “as quickly as possible” – as in “instant” – to “as quickly as possible provided preventing externalities caused by the speed of decision making and trading itself”.
Update 19 march 2014:
via Finextra: New York attorney general sets sights on co-location.
“Rather than curbing the worst threats posed by high-frequency traders, our markets are becoming too focused on catering to them…It’s long past time that we focus on structural reforms to help eliminate the unfair advantages enjoyed by high-frequency traders,” says Schneiderman.