One of the interesting things about the shift to electronic trading is the proliferation of quotes against the number of trades actually transacted. Futures Industry Magazine picked this up in summer 2006 in a Tech Talk article. Black-box trading, which is a catch-all phrase encompassing automated trading systems and other triggered trading systems, seems to be a big culprit here. A system of trading that depends on real-time management across markets, like most arbitrage systems require, actually creates a demand for real-time quotes that didn’t exist in the past. It’s the stock ticker run amok
At Eurex, the time it takes to get a quote response (the ‘processing time for order messages’) has been reduced from about 1/3 second in 1994 to 40 milliseconds in 2007. At the same time, the average number of quotes processed per day has gone from something like a million/day in 2000 to 145 million/day in 2006. As the article notes, “in 2000, Eurex had 1.2 quotes per contract. In 2004, 2.16. By 2005, this had risen to 7.88, and by 2006 it had climbed to 17.09 – eight times as many quotes per contract as in 2001.”
This is what I mean when I speak of electronic trading as being a kind of WYSIWYG market. One upshot of this is that increased dependencies on the narrowing gap between ‘reported quote’ and ‘actual market’ means that delays and glitches will become increasingly consequential.