site banner
PaperclipPerfector  3d ago (text post)   2854 thread views

Small-Scale Question Sunday for January 12, 2025

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

3
Top Bottom Old Controversial Comments
Jump in the discussion.

No email address required.

Most HFT shops are mostly doing market making. Market making (i.e. quoting bid and ask prices and making a profit when other people cross your spread) is essential for well-functioning markets, and computers do it better than humans (and have done since shortly after 2000). The problem is the sheer amount of elite human capital going into a competition for speed which is now effectively zero sum because computers are placing and cancelling orders faster than a real-money investor can make decisions. To fix this without chasing away the market makers the markets rely on to function, you would need microstructure-level reform carried out by someone who knows what they are doing.

The most interesting proposals I have seen are:

  • All orders entering the market place are held until the end of the second, and then orders arriving in the same second are processed in a random order
  • Allow pricing in units of 1/10th of a cent per share (for trades which are not a multiple of 10 shares, the total price is rounded to the nearest cent in favour of the market maker) - this makes it an order of magnitude easier for a later order to outbid an earlier one on price, reducing the incentive to compete on speed.

Thank you for having tactical answers to this question. From the basic research I've done, it seems like the primary way to fix this stuff is to slow things down.

The only convincing steelmen I've heard for keeping things "as fast as possible" is:

  • Sub-second trading helps prevent more massive price swings
  • If US markets artificially slowed trading or rounded prices, activity would move to other countries

Any others you can think of?

The steel man for keeping things as fast as possible is that anything artificial we impose might be worse and fucking up market making would be a pretty big deal. So much money hinges on that a regulator really cannot afford some dumb solution that benefits a single arbitrary party or is open to abuse. It's not an unsolveable problem, but just letting people compete on speed does solve it pretty well, so there's not a ton of incentive to fuck with what currently works.

Crypto is trying a bunch of different things to solve their version of this (They refer to it as MEV, basically the problem of block producers reordering transactions to extract value by front-running), and solving it algorithimically at the protocol level in a way that doesn't have some sort of drawback is currently proving really difficult.

What is this place?

This website is a place for people who want to move past shady thinking and test their ideas in a court of people who don't all share the same biases. Our goal is to optimize for light, not heat; this is a group effort, and all commentators are asked to do their part.

The weekly Culture War threads host the most controversial topics and are the most visible aspect of The Motte. However, many other topics are appropriate here. We encourage people to post anything related to science, politics, or philosophy; if in doubt, post!

Check out The Vault for an archive of old quality posts. You are encouraged to crosspost these elsewhere.


Why are you called The Motte?

A motte is a stone keep on a raised earthwork common in early medieval fortifications. More pertinently, it's an element in a rhetorical move called a "Motte-and-Bailey", originally identified by philosopher Nicholas Shackel. It describes the tendency in discourse for people to move from a controversial but high value claim to a defensible but less exciting one upon any resistance to the former. He likens this to the medieval fortification, where a desirable land (the bailey) is abandoned when in danger for the more easily defended motte. In Shackel's words, "The Motte represents the defensible but undesired propositions to which one retreats when hard pressed."

On The Motte, always attempt to remain inside your defensible territory, even if you are not being pressed.


New post guidelines

If you're posting something that isn't related to the culture war, we encourage you to post a thread for it. A submission statement is highly appreciated, but isn't necessary for text posts or links to largely-text posts such as blogs or news articles; if we're unsure of the value of your post, we might remove it until you add a submission statement. A submission statement is required for non-text sources (videos, podcasts, images).

Culture war posts go in the culture war thread; all links must either include a submission statement or significant commentary. Bare links without those will be removed.

If in doubt, please post it!


Rules


Recommended Posts And Communities

Recommended Realtime Chats