Solving the HFT problem: Abolish continuous trading

By Felix Salmon
July 31, 2009

Michael Wellman has an intriguing idea for solving all the issues surrounding high-frequency trading at a stroke: switch from a market with continuous clearing to a market which clears once per second.

Orders accumulate over the interval, with no information about the order book available to any trading party. At the end of the period, the market clears at a uniform price, traders are notified, and the clearing price becomes public knowledge. Unmatched orders may expire or be retained at the discretion of the submitting traders.

Even with a period as short as one second, the call market totally eliminates any advantage of HFT systems. It does not eliminate the opportunities for algorithmic trading in general–just those that come from sub-second response time. No party has privileged information about order flow, and no party benefits by getting a shorter wire to the “trading floor”.

According to Wellman, there would be other advantages to discrete-time trading too, including lower volatility.

Would this plan essentially give everybody in the market the advantages of being in a dark pool which only exists for one second? On its face, I think it’s a good idea. What would the downside be?

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