"as you can trade against participants who entered order early in the period and couldn't incorporate informations from the remaining time into they pricing decision"
But with a heartbeat you wouldn't see the early order until the quantum elapsed. All orders would appear to have been placed on the period
"First: no ones pensions are changing in value because HFT."
"the solution is easy: queue all trades on a heart beat"
That's exactly the conclusion I came to after a recent tour of a bunch of HFT shops here in London.
Right now the fastest responder wins. This leads to co-location (putting your hardware physically in the exchange) and something called Flash Trading where, for a fee, you get access to bids fractions of a seconds before they enter the market.
This clearly isn't a fair, transparent market.
Put a heartbeat, 1ms or even as high as 5s, on the market. Market state only updates, in it's entirety, on that edge. And get rid of Flash Trading. That stuff is clearly not fair or even ethical.
The smooths out the unequal access to the best prices that currently exist for those that can afford it and even gives the algo shops time to more sophisticated analytics.
It's pretty shocking that, contrary to what you might think, the models that are driving the algorithms are pretty-simple minded and stuffed full of magic numbers. A senior guy at UBS admitted to me that there's absolutely no science involved in their construction. Verification is done on a monte-carlo type simulation with historical data and the model must continually be updated as trading conditions change. The quants are generally just looking for a new set of magic numbers that make the simulations profitable. Literally no-one understands how the models work and they bear absolutely no relation to the kind of 'Frost in Florida, Orange Juice futures up' kind of market conditions the man in the street might expect.
It's kind of frightening really that our pensions are changing in value based on the execution of these algorithms
One man's constant is another man's variable. -- A.J. Perlis
