6 ms·

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 rea

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.
- dmschulman 11y ago
  I just finished reading Flash Boys by Michael Lewis, it was an incredibly enlightening read. To answer your questions: 1) I think it's 350mcs across the board except in the case of firms which conduct suspect activity (canceling orders frequently for example). Adding the delay institutes a level playing field across anyone trading on the exchange. The basis of HFT is leveraging faster connection speeds to gain insight into other's trading strategies and exploiting those strategies, all before the other firm's trade reach the exchange. This is a HIGHLY simplistic explanation dealing with one form of arbitrage and given for brevity on the subject. 2) EDIT: the other guy explained this better! To your point about 350mcs being absurd to argue over, HFT firms manage regular trading speeds in NANOSECONDS. Look at 350mcs in those terms (350,000 nanoseconds) and it's not such a small number anymore.
  - kasey_junk 11y ago
    IEX only adds 350 usec in delay. I'd also add that if you just read Flash Boys you probably got a very incorrect view of what high frequency trading is all about and particular what cross exchange market making is about. You should read http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F....
    - dmschulman 11y ago
      A book written by a group of high-frequency trading firms, defending high-frequency trading. Hmm... Is this blogger's summary of Kovac's book accurate (http://blog.themistrading.com/2014/12/flash-war/ http://blog.themistrading.com/2014/12/flash-war/)? Seems like the book refutes the accusation of HFT front-running but: "Kovac then writes, “In other words, this research, cited by Lewis himself near the conclusion of his book, contradicts everything he has said about front-running in the prior two hundred pages.” Kovac suggests this is some kind of “Aha!” moment. See, he seems to say, there’s no front-running and Lewis’s own sources say so. Your guess is as good as mine on this, but Kovac seems to be the one who apparently didn’t read the research. Go to the next paragraph in Clark-Joseph’s paper: “[T]he private information about price-impact generated by an HFT’s small aggressive orders enables that HFT to trade ahead of predictable demand [that is, front-run demand] at only those times when it is profitable to do so (i.e., when price-impact is large).”"
CyberDildonics 11y ago
I'm glad there's no conflicting incentives or anything.
- andylei 11y ago
  i'm glad you didn't read the article and criticize it based on the contents or anything

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.
dmschulman 11y ago
I just finished reading Flash Boys by Michael Lewis, it was an incredibly enlightening read. To answer your questions: 1) I think it's 350mcs across the board except in the case of firms which conduct suspect activity (canceling orders frequently for example). Adding the delay institutes a level playing field across anyone trading on the exchange. The basis of HFT is leveraging faster connection speeds to gain insight into other's trading strategies and exploiting those strategies, all before the other firm's trade reach the exchange. This is a HIGHLY simplistic explanation dealing with one form of arbitrage and given for brevity on the subject. 2) EDIT: the other guy explained this better! To your point about 350mcs being absurd to argue over, HFT firms manage regular trading speeds in NANOSECONDS. Look at 350mcs in those terms (350,000 nanoseconds) and it's not such a small number anymore.
- kasey_junk 11y ago
  IEX only adds 350 usec in delay. I'd also add that if you just read Flash Boys you probably got a very incorrect view of what high frequency trading is all about and particular what cross exchange market making is about. You should read http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-F....
  - dmschulman 11y ago
    A book written by a group of high-frequency trading firms, defending high-frequency trading. Hmm... Is this blogger's summary of Kovac's book accurate (http://blog.themistrading.com/2014/12/flash-war/ http://blog.themistrading.com/2014/12/flash-war/)? Seems like the book refutes the accusation of HFT front-running but: "Kovac then writes, “In other words, this research, cited by Lewis himself near the conclusion of his book, contradicts everything he has said about front-running in the prior two hundred pages.” Kovac suggests this is some kind of “Aha!” moment. See, he seems to say, there’s no front-running and Lewis’s own sources say so. Your guess is as good as mine on this, but Kovac seems to be the one who apparently didn’t read the research. Go to the next paragraph in Clark-Joseph’s paper: “[T]he private information about price-impact generated by an HFT’s small aggressive orders enables that HFT to trade ahead of predictable demand [that is, front-run demand] at only those times when it is profitable to do so (i.e., when price-impact is large).”"

CyberDildonics 11y ago

I'm glad there's no conflicting incentives or anything.

andylei 11y ago
i'm glad you didn't read the article and criticize it based on the contents or anything