Unintuitive thesis results

[ronin]

> Fair point. The case I was thinking of was a liquid, thick market that's always one tick wide. 99/101 will either go to 99/100 or 100/101 in the next millisecond. If it goes back to 99/100, you should want to buy your remaining quantity again at 100, since nothing has changed from the last millisecond (unless you're an HFT guy, which goes back to EL's point). If it goes up to 100/101 you'd be happy to have good priority at 100, and you could always cancel it if you change your mind.





Yeah, no.



You moved the mid in the adverse direction by half tick. You just paid half a tick to gain priority. Now think about how much this priority is worth.



In the good scenario, you get filled passively on both the bid and the ask. You made a total of one tick plus two rebates altogether, which is half tick plus one rebate on each side.



In the bad scenario, you get filled passively on your bid, then scratch. You made half a tick and a rebate on the fill, and you paid it back on the scratch.



So the game essentially has the expectation of quarter tick plus half rebate plus fudge factor. And you just paid half a tick to play it.





> since nothing has changed from the last millisecond (unless you're an HFT guy, which goes back to EL's point)



That is also a point where you want to pause for a moment. Actually, everything has changed. To quote ancient Greeks, you can't step in the same river twice.



You impacted the market, and the market will react in some way. How it reacts says something. Maybe somebody replenishes the 100 from the ask, which tells you something. Maybe somebody rushes in to open 100 from the bid. Maybe somebody crosses to 101. Maybe somebody crosses to 99. Each of those may mean something. And none of them tells you that priority at 100 is worth more than quarter tick.