8 ms·

The 'Flash Boys' Exchange Is Growing Up

82 points by evanpw 11y ago

chollida1 11y ago
To lay the ground work for what's going on here.... In the US you can be an ATS(Alternative Trading System) or a full blown exchange. All dark pools are ATS's. This gives you a bit more leeway in terms of what you are allowed to do, ie hide orders, trade only at midpoint, trade only at certain volume's etc, even report trades in a slower fashion. A full blown exchange has alot more scrutiny but comes with one huge caveat, all other exchanges must route orders to you if you have the NBBO(National Best Bid or Offer) as dictated by the SEC's REG NMS 611. This means if an order to sell comes to the NYSE for 5.00 and takes out the entire first level forcing the NYSE to have a bid of 4.99 and there is still more volume in the order, the NYSE has to send the order to another exchange still showing $5.00 as its bid. Since the exchanges make money when each share is traded they don't really like to do this( as a side note, this is how flash orders came about, exchanges "flashed the order to a select few market makers for 50 milliseconds before sending it to another exchange giving the market makers a chance to fill it, and keeping the commissions at the exchange, people got pissing about it and it no longer happens). If IEX transitions from being a dark pool to an exchange this requirement to use their quote as part of the NBBO might mean more liquidity, and hence more profit, for them. The issue with this is that IEX is the first proposed exchange, atleast to my knowledge, that has an intentional built in delay, meaning that its quotes are by design slow and stale as compared to the other US exchanges. They are arguing to the SEC that since the NBBO is determined by the SIP(the system that aggregates all other exchanges quotes to determine what the NBBO is), which itself is slow, that this doesn't really matter much. On the other side of the debate is a literal whose who of the finance world, not just HFT's, arguing the slipper slope defense, ala well if they delay 350 microseconds, what's to stop someone from having a 2 second delay or 1 day delay in showing quote. I don't really have a dog in this fight but most people I know believe that IEX is going to lose this fight, though there is a loud contingent at the SEC itself that wants IEX to win to act as a test case for what the SEC can do to shape the market microsructure of the US cash equity markets. As to becoming a place to list your company, I think Levin is right here... no one cares at all what exchange the company is listed on, even the company itself. EDIT replaced ECN with ATS above
- kasey_junk 11y ago
  Do you know of they will be required to show book depth/qty or just best bid/offer prices?
  - minimax 11y ago
    This is actually a really interesting question. They would have to show size at the inside otherwise sweeping under Reg NMS would be impossible (you have no way of knowing how many shares to clear the protected quote). Also they already have a prop feed (IEX TOPS) that already shows size/price at the inside. Under their proposed Rule 11.330, they only have two prop feeds which are the TOPS feed and a last sale feed. So no full depth feed. They would be the only US equities exchange without a full depth feed, but it looks like that's what they want to do.
- evanpw 11y ago
  > All dark pools are ECN's This isn't quite true. Every dark pool is an ATS (alternative trading system). An ECN is a different kind of ATS that displays its quotes publically, unlike a dark pool. I don't think there are any ECNs left that have any kind of volume (since LavaFlow shut down in January).
  - chollida1 11y ago
    Yikes, you are 100% correct. I appreciate the correction! https://www.sec.gov/divisions/marketreg/mrecn.shtml https://www.sec.gov/divisions/marketreg/mrecn.shtml I blame wikipedia which says: > ECNs are sometimes also referred to as alternative trading systems or alternative trading networks.
wdewind 11y ago
I am deeply confused by IEX. It seems like anyone who knows anything about HFT thinks the narrative proposed in Flash Boys is completely ridiculous and mostly incorrect, including what Brad Katsuyama says. Is there something else interesting about IEX that people outside the industry don't really understand, or is it an entire company of people who have deeply flawed ideas about HFT and how it works?
- kasey_junk 11y ago
  Just because Flash Boys presents modern electronic exchanges incorrectly, does not mean that some people aren't worse off in the modern HFT world. In particular, large block buyers, who previously got to take advantage of inefficient price discovery to get better prices have been negatively impacted. It is in their best interests to make it possible to buy a very large amount of traded products without the price changing. IEX is built from the ground up for those market participants and none of them have any misunderstanding about how the market works. They just don't like it.
  - vasilipupkin 11y ago
    "IEX is built from the ground up for those participants". This is not really correct. Why? because a huge percentage of IEX volume is HFT, just like on any other exchange or dark pool . Their whole solution is nothing but a marketing gimmick. All the major HFT firms trade on IEX just fine
    - wdewind 11y ago
      Can you expand on how IEX's delay isn't preventing HFT from succeeding? I don't really understand enough about the financial markets to know what you mean.
      - vasilipupkin 11y ago
        every exchange takes some amount of time to match orders. IEX is no different. Let me ask you this way. Why would you expect IEX delay to prevent HFT from succeeding ?
sabalaba 11y ago
I wonder why they're using a "magic shoebox" instead of a call market a la http://ai.eecs.umich.edu/people/wellman/?p=40 http://ai.eecs.umich.edu/people/wellman/?p=40.
- kasey_junk 11y ago
  Because call markets don't actually solve any of the supposed problems of HFT. Unless the call market has a global monopoly (an impossibility that we wouldn't want if it were available) venue arbitrage is still an issue. Further, no one who proposes call markets ever talks about the matching algorithm in the face of order book imbalances. How you do tie-breakers can either still have speed advantages or has other probably worse disadvantages.
  - vasilipupkin 11y ago
    neither does their magic shoebox. It doesn't solve anything and HFT firms aren't meaningfully impacted by the shoebox
a-dub 11y ago
What would happen if you split the tick interval to three 30 second intervals, where during the first interval new orders are collected in private, the second serves as a 30 second waiting period, and at the third all previously private orders and matches/trades are made public and broadcast? So collect (30s) -> wait (30s) -> broadcast (30s) -> collect...
- msravi 11y ago
  Why 30s? Why not 10s? Or 1hr? Or 1day?
  - a-dub 11y ago
    Sure. The point is that t >> worst case synchronization latency.
- PakG1 11y ago
  So what you're saying is that traders should play Diplomacy....
- jplewicke 11y ago
  One of the better proposals to fix whatever market structure issues we have is to move to "frequent batch auctions", in which a micro-auction would occur every 30 seconds or minute, which would amount to a similar thing. I'm not aware of any research that discusses whether such a system would be workable in the presence of the existing continuous trading market.
  - harryh 11y ago
    There is research on this. It won't work the way you hope. Here is the problem: What happens if in a single batch you have more buy orders than sell orders at a given price (or vice versa)?
    - a-dub 11y ago
      One side eats up all the liquidity on the other side and the price moves appropriately in the next tick? It would clearly have to be separate from the high frequency discrete market. (c'mon, don't call it continuous!)

82 points by evanpw 11y ago

To lay the ground work for what's going on here.... In the US you can be an ATS(Alternative Trading System) or a full blown exchange. All dark pools are ATS's. This gives you a bit more leeway in terms of what you are allowed to do, ie hide orders, trade only at midpoint, trade only at certain volume's etc, even report trades in a slower fashion. A full blown exchange has alot more scrutiny but comes with one huge caveat, all other exchanges must route orders to you if you have the NBBO(National Best Bid or Offer) as dictated by the SEC's REG NMS 611. This means if an order to sell comes to the NYSE for 5.00 and takes out the entire first level forcing the NYSE to have a bid of 4.99 and there is still more volume in the order, the NYSE has to send the order to another exchange still showing $5.00 as its bid. Since the exchanges make money when each share is traded they don't really like to do this( as a side note, this is how flash orders came about, exchanges "flashed the order to a select few market makers for 50 milliseconds before sending it to another exchange giving the market makers a chance to fill it, and keeping the commissions at the exchange, people got pissing about it and it no longer happens). If IEX transitions from being a dark pool to an exchange this requirement to use their quote as part of the NBBO might mean more liquidity, and hence more profit, for them. The issue with this is that IEX is the first proposed exchange, atleast to my knowledge, that has an intentional built in delay, meaning that its quotes are by design slow and stale as compared to the other US exchanges. They are arguing to the SEC that since the NBBO is determined by the SIP(the system that aggregates all other exchanges quotes to determine what the NBBO is), which itself is slow, that this doesn't really matter much. On the other side of the debate is a literal whose who of the finance world, not just HFT's, arguing the slipper slope defense, ala well if they delay 350 microseconds, what's to stop someone from having a 2 second delay or 1 day delay in showing quote. I don't really have a dog in this fight but most people I know believe that IEX is going to lose this fight, though there is a loud contingent at the SEC itself that wants IEX to win to act as a test case for what the SEC can do to shape the market microsructure of the US cash equity markets. As to becoming a place to list your company, I think Levin is right here... no one cares at all what exchange the company is listed on, even the company itself. EDIT replaced ECN with ATS above

kasey_junk 11y ago
Do you know of they will be required to show book depth/qty or just best bid/offer prices?
- minimax 11y ago
  This is actually a really interesting question. They would have to show size at the inside otherwise sweeping under Reg NMS would be impossible (you have no way of knowing how many shares to clear the protected quote). Also they already have a prop feed (IEX TOPS) that already shows size/price at the inside. Under their proposed Rule 11.330, they only have two prop feeds which are the TOPS feed and a last sale feed. So no full depth feed. They would be the only US equities exchange without a full depth feed, but it looks like that's what they want to do.
evanpw 11y ago
> All dark pools are ECN's This isn't quite true. Every dark pool is an ATS (alternative trading system). An ECN is a different kind of ATS that displays its quotes publically, unlike a dark pool. I don't think there are any ECNs left that have any kind of volume (since LavaFlow shut down in January).
- chollida1 11y ago
  Yikes, you are 100% correct. I appreciate the correction! https://www.sec.gov/divisions/marketreg/mrecn.shtml https://www.sec.gov/divisions/marketreg/mrecn.shtml I blame wikipedia which says: > ECNs are sometimes also referred to as alternative trading systems or alternative trading networks.

wdewind 11y ago

I am deeply confused by IEX. It seems like anyone who knows anything about HFT thinks the narrative proposed in Flash Boys is completely ridiculous and mostly incorrect, including what Brad Katsuyama says. Is there something else interesting about IEX that people outside the industry don't really understand, or is it an entire company of people who have deeply flawed ideas about HFT and how it works?

kasey_junk 11y ago
Just because Flash Boys presents modern electronic exchanges incorrectly, does not mean that some people aren't worse off in the modern HFT world. In particular, large block buyers, who previously got to take advantage of inefficient price discovery to get better prices have been negatively impacted. It is in their best interests to make it possible to buy a very large amount of traded products without the price changing. IEX is built from the ground up for those market participants and none of them have any misunderstanding about how the market works. They just don't like it.
- vasilipupkin 11y ago
  "IEX is built from the ground up for those participants". This is not really correct. Why? because a huge percentage of IEX volume is HFT, just like on any other exchange or dark pool . Their whole solution is nothing but a marketing gimmick. All the major HFT firms trade on IEX just fine
  - wdewind 11y ago
    Can you expand on how IEX's delay isn't preventing HFT from succeeding? I don't really understand enough about the financial markets to know what you mean.
    - vasilipupkin 11y ago
      every exchange takes some amount of time to match orders. IEX is no different. Let me ask you this way. Why would you expect IEX delay to prevent HFT from succeeding ?

sabalaba 11y ago

I wonder why they're using a "magic shoebox" instead of a call market a la http://ai.eecs.umich.edu/people/wellman/?p=40 http://ai.eecs.umich.edu/people/wellman/?p=40.

kasey_junk 11y ago
Because call markets don't actually solve any of the supposed problems of HFT. Unless the call market has a global monopoly (an impossibility that we wouldn't want if it were available) venue arbitrage is still an issue. Further, no one who proposes call markets ever talks about the matching algorithm in the face of order book imbalances. How you do tie-breakers can either still have speed advantages or has other probably worse disadvantages.
- vasilipupkin 11y ago
  neither does their magic shoebox. It doesn't solve anything and HFT firms aren't meaningfully impacted by the shoebox

a-dub 11y ago

What would happen if you split the tick interval to three 30 second intervals, where during the first interval new orders are collected in private, the second serves as a 30 second waiting period, and at the third all previously private orders and matches/trades are made public and broadcast? So collect (30s) -> wait (30s) -> broadcast (30s) -> collect...

msravi 11y ago
Why 30s? Why not 10s? Or 1hr? Or 1day?
- a-dub 11y ago
  Sure. The point is that t >> worst case synchronization latency.
PakG1 11y ago
So what you're saying is that traders should play Diplomacy....
jplewicke 11y ago
One of the better proposals to fix whatever market structure issues we have is to move to "frequent batch auctions", in which a micro-auction would occur every 30 seconds or minute, which would amount to a similar thing. I'm not aware of any research that discusses whether such a system would be workable in the presence of the existing continuous trading market.
- harryh 11y ago
  There is research on this. It won't work the way you hope. Here is the problem: What happens if in a single batch you have more buy orders than sell orders at a given price (or vice versa)?
  - a-dub 11y ago
    One side eats up all the liquidity on the other side and the price moves appropriately in the next tick? It would clearly have to be separate from the high frequency discrete market. (c'mon, don't call it continuous!)