IMO this is a ridiculous solution to the problem - rather than creating a market that's set up in a way so that high frequency traders can't get an edge (for instance, creating a market structured so that money/speed/location/regulatory status doesn't actually give you any advantage in trading), they're just banning anyone that doesn't fit their definition of "value trader" from the market.
It will be interesting to see if this market provides better pricing for non-HFT participants.
Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much.
Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders.
Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...
I honestly didn't read it closely, but apparently you didn't either. Your assertion:
Given that the only difference between this and a normal
market is that a bunch of people offering to buy and/or
sell at prices more favorable than the current inside
bid/ask are banned from the market, I'm going to go out
on a limb and say that no, it won't help pricing very
much.
compare that with:
Since trading on Light Pool will be more expensive and
slower for those firms, they’re not likely to use the
ECN, reducing the negative selection investors
experience, Galinov said.
Contributors, which will include long-term investors,
will receive a “significant” rebate when they trade
against orders resting in Light Pool, while neutral
firms, or those whose behavior falls between the other
groups, may or may not get one, Galinov said.
So they are trying to get incentives right, rather than outright banning HFTs. Just slowing down the market may be sufficient, try reading this:
http://ai.eecs.umich.edu/people/wellman/?p=40
(disclaimer: it's from my Ph.D. advisor, so I'm slightly biased)
Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes.
It will be interesting to see if this market provides better pricing for non-HFT participants.
Given that the only difference between this and a normal market is that a bunch of people offering to buy and/or sell at prices more favorable than the current inside bid/ask are banned from the market, I'm going to go out on a limb and say that no, it won't help pricing very much.
Or, rather, what it will do is move profits that would have gone to the HFT firms and shift them to people placing normal, non-speculative/exploitative/high-frequency limit orders.
Which means that really, there will be an arms race to figure out how to place orders that are as exploitative as possible without tripping the banhammer. The people that push the closest that limit will make the most money, but spreads will still likely be quite a bit higher than in an unfettered market if the rules have any teeth at all - long term value traders are not good at keeping spreads thin, I'd guess that in the current markets their effects on spreads are not even measurable at all, they are so insignificant...