The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response
High frequency trading has captured the public's imagination, for example, the book Flash Boys: A Wall Street Revolt, hit the top of the New York Times bestseller list a week after its release. The author, Michael Lewis, was quoted as saying "the stock market is rigged."
Professor Eric Budish has argued that a lot of the HFT debate is happening at the wrong level. The right question is not "is HFT good or evil?", rather, the right question is deeper--do we have the right market design?
Budish argues that a lot of the negetive behaviors associated with HFT are better thought of as symptoms of an underlying structural flaw in the design of modern finance exchanges. The flaw is that stocks trade in "continuous time" - you can buy or sell stock at literally any instant of the trading day, measured down to the nanosecond. The alternative is that stocks trade in "discrete time"- say, once per tenth of a second- using batch auctions. By analogy, stocks trade in discrete prices- increments of $0.01. Budish is arguing that stocks should trade in discrete time as well. This would transform competition on speed into competition on price, reduce the market's complexity, stop the HFT arms race, and ultimately improve liquidity for investors.
Budish's proposal has attracted attention from wall street, HFT firms, and regulators. SEC Chair Mary Jo White referenced Budish's proposal in her June 2014 speech on equity market structure. NY AG Eric Schneiderman explicitly endorsed the concept in his March 2014 speech on HFT. For references, see: http://faculty.chicagobooth.edu/eric.budish/.
Join us as Budish discusses the broader HFT landscape and market structure debate and separates fact from fiction to help us understand today's trading world.
$7 advanced registration; $10 at the door.
John Salvino, '06
Partner, Wealth Management