7 ms·

Plan for New Stock Exchange Stirs Debate

70 points by greeneggs 11y ago

Animats 11y ago
The EU is imposing a tax on financial transactions effective January 1, 2016.[1] The tax is tiny (0.1% on most transactions, 0.01% on derivatives) but enough to discourage high frequency trading. It's going to be interesting to see how that works out. [1] https://en.wikipedia.org/wiki/European_Union_financial_transaction_tax https://en.wikipedia.org/wiki/European_Union_financial_trans...
- PhantomGremlin 11y ago
  The EU is imposing a tax on financial transactions The devil is in the details, but at first glance that looks like an absolute disaster in terms of stock trading. For example, if a mutual fund bought a stock twice in a year, and then sold that stock twice in a year, that's 0.4% being gifted to the government right there? From just that mutual fund. And another 0.4% from whoever is on the other side? Wow! Am I reading that right? Also it says "financial institutions" but looks like it will also apply to individuals. The Wiki page says "If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client." I think that could dry up trading volumes by about 95% in the affected countries. For example, when I sell stock now, a market maker takes the other side. But he won't want to if he has to pay 0.1% for the privilege. So now I can't sell a stock to an intermediary? I need to wait for another investor or a mutual fund to take the other side of my trade? What am I missing? That can't be right? Edit: one immediate thing that sticks out is that "derivatives" will be created to replace stocks, since the tax savings is about 90% by doing that. For example, let's say a stock costs $10.00. Why not create an "American style" call option on that stock, strike price $0.01, expiration date 2099. The value of that option is $9.99. But the tax rate is 0.01% on the derivative, vs 0.1% on the stock itself. Someone hasn't thought things through here.
  - kasey_junk 11y ago
    > But he won't want to if he has to pay 0.1% for the privilege Market makers will take the other side of that trade, they will just price the tax into what they are offering you, so you will pay both ends of it.
  - parennoob 11y ago
    > if a mutual fund bought a stock twice in a year, and then sold that stock twice in a year I think the idea is that such moves contribute to the instability of the market as a whole, and hence should pay a small penalty for it. > I think that could dry up trading volumes by about 95% in the affected countries. Yes, it is not entirely clear that large trading volumes contribute anything positive to the economy as a whole. There are real people somewhere in the picture who are trying to buy/sell shares in regular and are getting shafted in terms of either buying price or trading fees by high-frequency bots. The tax should even out things a little bit for the average person.
    - rhino369 11y ago
      Buying and selling don't contribute to market instability.
  - SilasX 11y ago
    Yeah, that makes no sense; every sane plan I heard for taxing stock transactions involves a flat amount per transaction, the idea being to discourage large quantities of trading (or at least convert it into revenue) while leaving the calm, occasional trader/mutual fund mostly untouched.
- MichaelGG 11y ago
  That's sounds bad. All it'll do is increase spreads. Hurray?
- justin66 11y ago
  > The tax is tiny (0.1% on most transactions, 0.01% on derivatives) What's tiny about 0.1%? The amount of money that would suddenly be leaking out of a big mutual fund when it rebalances or reconciles at the end of the day could end up being huge. The amount of buying and selling something like a Vanguard index fund has to do to track its index with precision is probably pretty impressive, but it's not the kind of weird HFT which annoys people. Introducing inefficiencies into that process is something I cannot believe EU regulators really intended... did they? Everyday investors lose, the taxman wins, and to what end? It just seems kind of stupid.
  - phaemon 11y ago
    It is tiny. Your Vanguard fund doesn't do manual rebalancing like that. It rebalances automatically by deciding what to buy as new money is added to the fund and what to sell as money is withdrawn. Charge an extra 0.1% when someone deposits and 0.1% when they withdraw, and that means 0.2% covers the entire cost.
    - nickles 11y ago
      Many low fee funds charge exactly 0.1% annually for the magement fee. They are frequently designed to be 'no load' funds, which, under regulatory requirements, may charge a maximum management fee of 0.25% per year. Additionally, they are prohibited from charging the load fees you described (entry/exit) if they are marketed as 'no load'. Investors benefit substantially from the availability of these funds, and charging 10 basis points (0.1%) per transaction makes them untenable. You should also consider that rebalancing happens more frequently than when shares are created or redeemed. Suppose a fund has a mandate to track the S&P 500. If a symbol is replaced by another in the index, the fund will need to alter its holdings, incurring transaction fees.
      - phaemon 11y ago
        I'm not really sure what point you're trying to make with your first paragraph. The regulations are going to change. The funds aren't prohibited from following the law! Investors will then benefit 0.2% less substantially from these funds, I guess. As for the second point, how is that any different from rebalancing? Money added to the fund is used to buy the new shares. Money withdrawn from the fund is marked against sales of the old shares, no?
- gd1 11y ago
  The problem with a FTT is that it is a cascading tax. Whereas a VAT or GST is charged only on the difference between input and output. I buy some wood for $10, make a table, sell it for $15, GST/VAT is 10%, so I pay out $1 buying the wood, and collect $1.50 selling the table. I only have to forward the difference, 50c, to the government. With an FTT, that 'tiny' tax is charged indiscriminately all the way through the chain. And passed through the chain to the end consumer. So the market maker pays it twice (in and out of a position) and their margins are razor thin. So spreads will increase by twice the tax for starters. Plus you as end consumer will pay it twice (on buying and selling). So at a bare minimum that 0.1% will be 0.4% for an end consumer. More if more middlemen are involved in the chain, since it just compounds. What are annual returns? 4-8%? So we're talking about the government taking 5-10% of your profits? Does it seem tiny still?
danharaj 11y ago
> Those companies have all said that IEX will introduce one more complex wrinkle that will end up benefiting one set of market participants over another, rather than leveling the playing field. Is there a notion of fairness that is both canonical and pins down one market structure as fairest?
- AnimalMuppet 11y ago
  I don't think there's any such notion of fairness. But if there is... There's a saying to the effect that "anything is difficult to explain to someone whose income depends on not understanding it". The hypothetical perfect notion of fairness will face many people giving fine-sounding but self-serving explanations of why it is not actually fair.
  - danharaj 11y ago
    I agree. There's also that fairness can be applied to the social structure that generates the rules for the market. Suppose that there is a fairest market structure. We may even call it the "free market". It may be the case that you can enforce the structure of the free market on everyone else, but a lot of people would be rather angry with you if you did it like a violent dictator. So it may be the case that a system that tries to enforce free market conditions must be allowed to deviate from that ideal in order to be itself fair.
- brudgers 11y ago
  I'm not suggesting that the proposal is more fair. But in the name of fairness an unfair system must be changed in ways that benefit some system participants over other system participants. Likewise I am not suggesting that the existing system is unfair. Only that the argument that some participants will benefit from changes more than others does not imply that the new conditions are unfair.
DeanWormer 11y ago
The Citadel letter mentioned in the article (http://www.sec.gov/comments/10-222/10222-16.pdf http://www.sec.gov/comments/10-222/10222-16.pdf) is a very good read. I work in the industry and they hit all the main problems with IEX's approach.
- hackuser 11y ago
  > This damage to market quality would be further magnified by the “fast pass” that IEX proposes to give its affiliated routing broker-dealer (the “IEX Router”) and its pegged order types. It is ironic that IEX—a company supposedly founded to protect investors from various types of latency arbitrage—now proposes to offer pegged orders and IEX Router services that can and will be used by sophisticated trading firms to arbitrage the latency that IEX itself would create. Could you explain this in more general terms? Especially, 1) Does IEX propose to exempt some traders from the delay? Isn't that obviously worse than no delay at all? 2) What are "pegged orders"? Also, if you don't mind being spokesperson for an entire industry, is there a sense that when we are debating 350 microseconds, things are a bit absurd?
  - kasey_junk 11y ago
    Pegged orders are an order type where you tell the exchange "keep me at the best bid/offer" or even sometimes "keep me n levels off the best bid/offer". Its basically an order that allows the exchange itself to change your price for you so that you don't incur messaging latency and inconsistency.
  - hsk 11y ago
    I haven't read the documentation, but I can respond to your questions given what you quoted. 1) It seems that way. Presumably, they will require affiliates to follow stricter rules. Even so, you would expect that these affiliates would try their hardest to take advantage of their speed advantage. 2) Pegged orders are essentially orders that the exchange manages for you. For example, if you peg an order at the inside bid, your order will follow the market as it moves around. Essentially, these orders will react with close to zero latency since the exchange itself is modifying them. It's unclear how these orders will be used to game the market, since their logic is so simple and predefined by the exchange. In terms of time frame, it's just the evolution of technology. For example, processors are clocked in nanoseconds. When your limiting reagent is how quickly you can update based on changes in the world, you need lower latencies. That's one of the aspects of the system that IEX tries to solve, by adding a giant delay to everyone's orders, so that the jitter swallows any small advantage. One of the concerns of changing the rules, however, is that once smart people start using the system, they will eventually find some new way to game it, landing us not far from where we started.
unabridged 11y ago
Forget adding speed bumps, frequent batch auctions are the way to go. Group orders every second and match trades (and maybe give priority based on volume). There is no reason any company or trader cannot commit to price for 1s and it completely eliminates high frequency shenanigans.
- sseveran 11y ago
  You do realize that there are discreet intraday crosses already right?
  - CyberDildonics 11y ago
    What does that have to do with what you responded to?
    - sseveran 11y ago
      He is describing a discreet intraday cross. For traders who prefer to use them they already exist.
- kasey_junk 11y ago
  Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. There isn't "a market" there are lots of little ones, geographically dispersed and across jurisdictions. Further, there are already pro-rata matching engines, and they also have "high frequency shenanigans". In fact, they actually can encourage more gaming as you have to put in more quantity than you want, so you have to do something else to manage your risk.
  - bobcostas55 11y ago
    >Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. I find this extremely difficult to believe, got any numbers to back it up? Surely the vast majority of the volume comes from market making activity...
hackuser 11y ago
In case anyone initially overlooks it, as I did: The proposed delay is 350 micro-seconds, or millionths of a second, not the milli-seconds that ping measures for me. If the question is whether a 350 microsecond delay is acceptable and whether it's fair to small investors, we're asking the wrong questions. For example, should HN introduce a 350 microsecond delay to posting comments? Would that be fair? (In the correction at the bottom, you can see the NY Times made the same mistake I did.)
- agenticarus2 11y ago
  I don't honestly see how that is the same question
- powera 11y ago
  If I'm not mistaken, this is all people who will make less money because of this change claiming that "some other people" will make less money because of this change. It would be considered "FUD" if it was a Silicon Valley company saying this.
drham 11y ago
I'm pretty naive on this topic, but wouldn't adding an artificial delay only create more opportunities for arbitrage vs other exchanges?
oconnore 11y ago
What if you just accept algorithmic trading, and allow companies to upload an "agent" that handles trades for them? Each agent, running on a standardized VM, can be given the same amount of CPU cycles, the same standardized data feed, and logically run in the same time slice. Companies can add real time data to the feed, but it is also available to everyone else. Private data is delayed by a second or so, as are new agent uploads.
zaroth 11y ago
I can't believe so much is written about 350 usec in delay. I mean, that must be the least controversial change you would ever make. If someone wants to make an exchange with static added latency, that's not the same as making everyone's latency the same, which the article conflates. The change is nearly pointless, and they argue it to death. There are much more interesting things going on with exchanges than this.

70 points by greeneggs 11y ago

The EU is imposing a tax on financial transactions effective January 1, 2016.[1] The tax is tiny (0.1% on most transactions, 0.01% on derivatives) but enough to discourage high frequency trading. It's going to be interesting to see how that works out. [1] https://en.wikipedia.org/wiki/European_Union_financial_transaction_tax https://en.wikipedia.org/wiki/European_Union_financial_trans...

PhantomGremlin 11y ago
The EU is imposing a tax on financial transactions The devil is in the details, but at first glance that looks like an absolute disaster in terms of stock trading. For example, if a mutual fund bought a stock twice in a year, and then sold that stock twice in a year, that's 0.4% being gifted to the government right there? From just that mutual fund. And another 0.4% from whoever is on the other side? Wow! Am I reading that right? Also it says "financial institutions" but looks like it will also apply to individuals. The Wiki page says "If acting on behalf of a client, e.g., when acting as a broker, it would be able to pass on the tax to the client." I think that could dry up trading volumes by about 95% in the affected countries. For example, when I sell stock now, a market maker takes the other side. But he won't want to if he has to pay 0.1% for the privilege. So now I can't sell a stock to an intermediary? I need to wait for another investor or a mutual fund to take the other side of my trade? What am I missing? That can't be right? Edit: one immediate thing that sticks out is that "derivatives" will be created to replace stocks, since the tax savings is about 90% by doing that. For example, let's say a stock costs $10.00. Why not create an "American style" call option on that stock, strike price $0.01, expiration date 2099. The value of that option is $9.99. But the tax rate is 0.01% on the derivative, vs 0.1% on the stock itself. Someone hasn't thought things through here.
- kasey_junk 11y ago
  > But he won't want to if he has to pay 0.1% for the privilege Market makers will take the other side of that trade, they will just price the tax into what they are offering you, so you will pay both ends of it.
- parennoob 11y ago
  > if a mutual fund bought a stock twice in a year, and then sold that stock twice in a year I think the idea is that such moves contribute to the instability of the market as a whole, and hence should pay a small penalty for it. > I think that could dry up trading volumes by about 95% in the affected countries. Yes, it is not entirely clear that large trading volumes contribute anything positive to the economy as a whole. There are real people somewhere in the picture who are trying to buy/sell shares in regular and are getting shafted in terms of either buying price or trading fees by high-frequency bots. The tax should even out things a little bit for the average person.
  - rhino369 11y ago
    Buying and selling don't contribute to market instability.
- SilasX 11y ago
  Yeah, that makes no sense; every sane plan I heard for taxing stock transactions involves a flat amount per transaction, the idea being to discourage large quantities of trading (or at least convert it into revenue) while leaving the calm, occasional trader/mutual fund mostly untouched.
MichaelGG 11y ago
That's sounds bad. All it'll do is increase spreads. Hurray?
justin66 11y ago
> The tax is tiny (0.1% on most transactions, 0.01% on derivatives) What's tiny about 0.1%? The amount of money that would suddenly be leaking out of a big mutual fund when it rebalances or reconciles at the end of the day could end up being huge. The amount of buying and selling something like a Vanguard index fund has to do to track its index with precision is probably pretty impressive, but it's not the kind of weird HFT which annoys people. Introducing inefficiencies into that process is something I cannot believe EU regulators really intended... did they? Everyday investors lose, the taxman wins, and to what end? It just seems kind of stupid.
- phaemon 11y ago
  It is tiny. Your Vanguard fund doesn't do manual rebalancing like that. It rebalances automatically by deciding what to buy as new money is added to the fund and what to sell as money is withdrawn. Charge an extra 0.1% when someone deposits and 0.1% when they withdraw, and that means 0.2% covers the entire cost.
  - nickles 11y ago
    Many low fee funds charge exactly 0.1% annually for the magement fee. They are frequently designed to be 'no load' funds, which, under regulatory requirements, may charge a maximum management fee of 0.25% per year. Additionally, they are prohibited from charging the load fees you described (entry/exit) if they are marketed as 'no load'. Investors benefit substantially from the availability of these funds, and charging 10 basis points (0.1%) per transaction makes them untenable. You should also consider that rebalancing happens more frequently than when shares are created or redeemed. Suppose a fund has a mandate to track the S&P 500. If a symbol is replaced by another in the index, the fund will need to alter its holdings, incurring transaction fees.
    - phaemon 11y ago
      I'm not really sure what point you're trying to make with your first paragraph. The regulations are going to change. The funds aren't prohibited from following the law! Investors will then benefit 0.2% less substantially from these funds, I guess. As for the second point, how is that any different from rebalancing? Money added to the fund is used to buy the new shares. Money withdrawn from the fund is marked against sales of the old shares, no?
gd1 11y ago
The problem with a FTT is that it is a cascading tax. Whereas a VAT or GST is charged only on the difference between input and output. I buy some wood for $10, make a table, sell it for $15, GST/VAT is 10%, so I pay out $1 buying the wood, and collect $1.50 selling the table. I only have to forward the difference, 50c, to the government. With an FTT, that 'tiny' tax is charged indiscriminately all the way through the chain. And passed through the chain to the end consumer. So the market maker pays it twice (in and out of a position) and their margins are razor thin. So spreads will increase by twice the tax for starters. Plus you as end consumer will pay it twice (on buying and selling). So at a bare minimum that 0.1% will be 0.4% for an end consumer. More if more middlemen are involved in the chain, since it just compounds. What are annual returns? 4-8%? So we're talking about the government taking 5-10% of your profits? Does it seem tiny still?

danharaj 11y ago

> Those companies have all said that IEX will introduce one more complex wrinkle that will end up benefiting one set of market participants over another, rather than leveling the playing field. Is there a notion of fairness that is both canonical and pins down one market structure as fairest?

AnimalMuppet 11y ago
I don't think there's any such notion of fairness. But if there is... There's a saying to the effect that "anything is difficult to explain to someone whose income depends on not understanding it". The hypothetical perfect notion of fairness will face many people giving fine-sounding but self-serving explanations of why it is not actually fair.
- danharaj 11y ago
  I agree. There's also that fairness can be applied to the social structure that generates the rules for the market. Suppose that there is a fairest market structure. We may even call it the "free market". It may be the case that you can enforce the structure of the free market on everyone else, but a lot of people would be rather angry with you if you did it like a violent dictator. So it may be the case that a system that tries to enforce free market conditions must be allowed to deviate from that ideal in order to be itself fair.
brudgers 11y ago
I'm not suggesting that the proposal is more fair. But in the name of fairness an unfair system must be changed in ways that benefit some system participants over other system participants. Likewise I am not suggesting that the existing system is unfair. Only that the argument that some participants will benefit from changes more than others does not imply that the new conditions are unfair.

DeanWormer 11y ago

The Citadel letter mentioned in the article (http://www.sec.gov/comments/10-222/10222-16.pdf http://www.sec.gov/comments/10-222/10222-16.pdf) is a very good read. I work in the industry and they hit all the main problems with IEX's approach.

hackuser 11y ago
> This damage to market quality would be further magnified by the “fast pass” that IEX proposes to give its affiliated routing broker-dealer (the “IEX Router”) and its pegged order types. It is ironic that IEX—a company supposedly founded to protect investors from various types of latency arbitrage—now proposes to offer pegged orders and IEX Router services that can and will be used by sophisticated trading firms to arbitrage the latency that IEX itself would create. Could you explain this in more general terms? Especially, 1) Does IEX propose to exempt some traders from the delay? Isn't that obviously worse than no delay at all? 2) What are "pegged orders"? Also, if you don't mind being spokesperson for an entire industry, is there a sense that when we are debating 350 microseconds, things are a bit absurd?
- kasey_junk 11y ago
  Pegged orders are an order type where you tell the exchange "keep me at the best bid/offer" or even sometimes "keep me n levels off the best bid/offer". Its basically an order that allows the exchange itself to change your price for you so that you don't incur messaging latency and inconsistency.
- hsk 11y ago
  I haven't read the documentation, but I can respond to your questions given what you quoted. 1) It seems that way. Presumably, they will require affiliates to follow stricter rules. Even so, you would expect that these affiliates would try their hardest to take advantage of their speed advantage. 2) Pegged orders are essentially orders that the exchange manages for you. For example, if you peg an order at the inside bid, your order will follow the market as it moves around. Essentially, these orders will react with close to zero latency since the exchange itself is modifying them. It's unclear how these orders will be used to game the market, since their logic is so simple and predefined by the exchange. In terms of time frame, it's just the evolution of technology. For example, processors are clocked in nanoseconds. When your limiting reagent is how quickly you can update based on changes in the world, you need lower latencies. That's one of the aspects of the system that IEX tries to solve, by adding a giant delay to everyone's orders, so that the jitter swallows any small advantage. One of the concerns of changing the rules, however, is that once smart people start using the system, they will eventually find some new way to game it, landing us not far from where we started.

unabridged 11y ago

Forget adding speed bumps, frequent batch auctions are the way to go. Group orders every second and match trades (and maybe give priority based on volume). There is no reason any company or trader cannot commit to price for 1s and it completely eliminates high frequency shenanigans.

sseveran 11y ago
You do realize that there are discreet intraday crosses already right?
- CyberDildonics 11y ago
  What does that have to do with what you responded to?
  - sseveran 11y ago
    He is describing a discreet intraday cross. For traders who prefer to use them they already exist.
kasey_junk 11y ago
Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. There isn't "a market" there are lots of little ones, geographically dispersed and across jurisdictions. Further, there are already pro-rata matching engines, and they also have "high frequency shenanigans". In fact, they actually can encourage more gaming as you have to put in more quantity than you want, so you have to do something else to manage your risk.
- bobcostas55 11y ago
  >Batch auctions don't deal with the main area of "high frequency shenanigans" which is cross exchange arbitrage. I find this extremely difficult to believe, got any numbers to back it up? Surely the vast majority of the volume comes from market making activity...

hackuser 11y ago

In case anyone initially overlooks it, as I did: The proposed delay is 350 micro-seconds, or millionths of a second, not the milli-seconds that ping measures for me. If the question is whether a 350 microsecond delay is acceptable and whether it's fair to small investors, we're asking the wrong questions. For example, should HN introduce a 350 microsecond delay to posting comments? Would that be fair? (In the correction at the bottom, you can see the NY Times made the same mistake I did.)

agenticarus2 11y ago
I don't honestly see how that is the same question
powera 11y ago
If I'm not mistaken, this is all people who will make less money because of this change claiming that "some other people" will make less money because of this change. It would be considered "FUD" if it was a Silicon Valley company saying this.

drham 11y ago

I'm pretty naive on this topic, but wouldn't adding an artificial delay only create more opportunities for arbitrage vs other exchanges?

oconnore 11y ago

What if you just accept algorithmic trading, and allow companies to upload an "agent" that handles trades for them? Each agent, running on a standardized VM, can be given the same amount of CPU cycles, the same standardized data feed, and logically run in the same time slice. Companies can add real time data to the feed, but it is also available to everyone else. Private data is delayed by a second or so, as are new agent uploads.

zaroth 11y ago

I can't believe so much is written about 350 usec in delay. I mean, that must be the least controversial change you would ever make. If someone wants to make an exchange with static added latency, that's not the same as making everyone's latency the same, which the article conflates. The change is nearly pointless, and they argue it to death. There are much more interesting things going on with exchanges than this.