In a recent post I noted the massive investments that are going into moving the servers of traders for hedge funds and such like as physically close as possible to exchanges so as to get a few milliseconds ahead of their competitors. I proposed this solution
Buyers and sellers would send in orders as they do now. But they would go into one minute batches. Thus whether your order arrived in the first or the last second of a one minute segment of time, it would go into the pool of buyers and sellers in a random order for that minute.
I was thinking that this solution would need to be a regulatory one. But when I thought about it (this was in the shower – as usual!) it seemed to me that exchanges actually have an incentive to do this themselves. Why? Because, so long as the thing that’s traded is only traded on their exchange, they can add value by privately regulating in the same way that a sporting stadium has an interest in privately trying to stop everyone standing up to see the game. It’s in everyone’s interest not to have to spend lots of money moving and optimising their computer set ups.
Except those that have already done it and perhaps those who think that they might do it better than others – or have more money to do it. Of course observing this interest is not the same thing as convincing the bureaucrats inside such organisations to change their ways, but it’s nice to have self interest on one’s side.
Oh Troppodillians, prithee relieve me of any errors in this analysis.