>If we arbitrarily limited transactions to human speed would there be some kind of systemwide downside?
It's worth asking what that artificial limitation would actually be, and how it would result in changing the game for market makers.
Continuous limit order book trading (how essentially all exchanges primarily work) is a fairly straightforward concept, and speed is an obvious differentiator for a successful market maker. In general, when complexity is introduced into trading, that creates more ways to exploit the rules for "unfair" gain. Assuming you believe market makers are necessary for a healthy market, you'd have to think of how some other system (like frequent batched auctions) would change the differentiators for successful market makers, and whether those changes are "good" or "fair."
Lets start with a hypothetical 'human speed' similar to how things used to be in the pre-electric world.
What if there were only one trade made per day? If every day buyers and sellers (with price limits in place) were resolved similar to a dutch auction (or some other 'fair' process).
What if that happened every hour? 30 min, 20 min? 10 min?
I think maybe every 10 min could be a good cycle. That would give a human duration of time for a buy/sell blackout (about 60 seconds), plenty of time for everything submitted to be tabulated, signed, and then published, and 9 full min to figure out what you want to do in the next order period.
This concept already exists: it's a batch auction dark pool.
One big problem with batch auctions as a global solution is that conceptually, trades span multiple markets. You have to figure out how your 500ms futures batch auction is going to interact with the unrelated market for the underlying instrument.
Probably the biggest problem is the problem itself, which, in the case of HFT, probably just isn't enough of a problem to reengineer all of market microstructure to fix. The biggest pure HFT firms are worth just a fraction of the biggest investment firms. Major purchasers of liquidity (pension funds, Vanguard) are happy with the execution they're getting. None of this stuff hurts retail traders (on the contrary, it probably helps them on the whole).
Batch auctions don't eliminate the speed advantage, because it is still incredibly valuable to be the last one to get information into the auction before it crosses. How sure are you that this will decrease whatever problem you think HFT causes?
The best fix to wasteful HFT is actually to increase the precision of prices on the exchange. The reason why these races are a thing is that prices can only change in fixed and sometimes relatively large increments, such as one cent, or perhaps more. Allowing prices to change in smaller increments ought to be good for both increasing liquidity, and removing the incentive for traders (humans or automated) to 'rush' to the market so that their quotes will take precedence over others.
Exchanges do very detailed studies of what tick sizes should be, as well as setting fifo/pro-rata ratios. Many products that have seemingly large tick sizes like eg treasuries or vix would not work otherwise. MMs will not be compensated enough for taking risk and will leave, liquidity will dry up, then liquidity-takers who are unable to execute desired size will also leave.
What is "wasteful" about HFT and how would it be reduced with smaller tick sizes? It seems like there would need to be considerably more order activity with smaller tick sizes. I understand the intuition that the ability to compete more on price should reduce the need to compete on speed, but surely it's more complicated than that.
Presumably, the greater the time period between auctions, the more risk there is for market makers, and therefore the greater cost to customers. I'm sure there's a sweet spot that is less than once per day, and greater than continuous. But perhaps determining that sweet spot isn't worth the added complexity, and letting them fight amongst each other over speed is just better for everyone.
It's worth asking what that artificial limitation would actually be, and how it would result in changing the game for market makers.
Continuous limit order book trading (how essentially all exchanges primarily work) is a fairly straightforward concept, and speed is an obvious differentiator for a successful market maker. In general, when complexity is introduced into trading, that creates more ways to exploit the rules for "unfair" gain. Assuming you believe market makers are necessary for a healthy market, you'd have to think of how some other system (like frequent batched auctions) would change the differentiators for successful market makers, and whether those changes are "good" or "fair."