If orders are filled pro rata, is there still incentive to engage in HFT? Because pro rata nullifies the time precedence rule, my intuition is no, but I figure there could be other aspects to it I'm unaware of.
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$\begingroup$ E-mini futures? $\endgroup$– pyCthonOct 25, 2013 at 2:49
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4 Answers
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The Eurodollar market is partially pro-rata. And there is a lot of HFT on it. Getting out of the book when conditions are not right is very much HFT.
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1$\begingroup$ When you say getting out of the book, do you mean order cancelling or something else? $\endgroup$ Mar 13, 2011 at 22:06
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$\begingroup$ Yes, order canceling when your algo feels that it's a bad place to be in the book (it's about to get hit) $\endgroup$– MehMar 14, 2011 at 11:26
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$\begingroup$ The "partially" aspect is crucial: there is a time queue and the first order in the queue gets satisfied and then remaining contracts are distributed pro-rata followed by a clean-up round for round-off errors. Queue position is very important. $\endgroup$– kurtosisAug 11, 2020 at 8:05
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Market markers still have to consume market data. The techniques required to scale a live order book in real-time will be the same regardless of the intended use case. So while the strategies will be different from what we know as HFT (and even the participants different), the systems in use will be very similar.
answered Mar 13, 2011 at 4:42
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My guess is you are right in that it will be unprofitable to be a liquidity provider because of the lack of time priority.
However, liquidity taking strategy (taking out an order that is mis-priced) is still a speed game.
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$\begingroup$ By 'taking out an order' do you mean cancelling your own order or filling someone else's? $\endgroup$ Mar 13, 2011 at 22:10
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$\begingroup$ Taking liquidity usually means filling someone else's. $\endgroup$– KonstaApr 18, 2012 at 21:32
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Yes. You're right that queue position is less important in a pure pro-rata market. But in a market that is very deep, such as Eurodollars, the cost of getting adversely selected ("catching a falling dagger") is huge (very large bid/ask spread). So it is critical to cancel any open orders quickly when the price is about to move.
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$\begingroup$ do you have a resource as to why queue position is important? $\endgroup$– TrajanFeb 24, 2019 at 10:26