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This NYT piece is heavy on moralizing rhetoric and light on technical details. The BloombergView piece by Matt Levine [1] is much better: "It's important to re

This NYT piece is heavy on moralizing rhetoric and light on technical details. The BloombergView piece by Matt Levine [1] is much better: "It's important to realize that slowing everyone down by 350 microseconds can't possibly help anyone. As Hudson River Trading said in its comment letter: "Similar to a 100-meter sprint, if you simply add 350 microseconds to each participant’s time, neither the order in which they finish nor their time differentials will change."" It would indeed be pointless if everything was slowed down by 350μs, which is why that is not the case. IEX lets its own "pegged orders" and "routable orders" cut the line, picking off liquidity at the other exchanges. If IEX is approved, there will be an arms race, with other exchanges inserting their own similar delays. Even worse, because of Reg NMS you can't legally avoid trading on IEX even if you wanted to. If the price of a stock is falling rapidly and you wanted to sell, IEX will always have the best price since it is stale by 350μs. Everyone will be forced to send their orders to IEX, even if everyone knows that the bid there is illusory. The Matt Levine piece is very good. Do please read the whole thing. [1] http://www.bloombergview.com/articles/2015-12-22/the-flash-boys-exchange-is-still-controversial http://www.bloombergview.com/articles/2015-12-22/the-flash-b...

vonklaus 11y ago
edit: levine article provides some good info.
amelius 11y ago
Of course the biggest problem is not coming up with a better (mathematically verified) scheme to run stock markets, but instead it is getting it accepted and implemented. Given the interests, I suspect this problem could be, for example, of the same level of difficulty as reforming gun laws in the US.
msellout 11y ago
A delay of 350 microseconds may very well make the market less turbulent and reduce the prevalence of "flash" crashes. Though the method of implementing the delay might not succeed, a forced delay would alleviate the arms race to lower latency algorithms. Lower latency means fewer computations and less memory, which means the strategy space is smaller. With enough players crowded into a small strategy space, the market becomes more frothy as periodically too many players collide on the same strategy. Placing a lower limit on latency allows a better balance between algorithmic complexity and latency. The strategy space will be larger and hopefully will be large enough that there's room for most everyone to try different strategies, making the market calmer. To get a sense for the mechanism of this phenomenon, check out the El Farol Bar Problem (https://en.wikipedia.org/wiki/El_Farol_Bar_problem https://en.wikipedia.org/wiki/El_Farol_Bar_problem). Unfortunately, IEX's proposed implementation of a delay is probably not as good as simply changing the precision of the exchange's clocks. If the exchange decided it would measure time only to the nearest second and orders occurring at the same second would be processed in random order, I expect that would be a better solution. Adding some randomness to the processing order at the 100s of milliseconds scale would go a long way to reducing front-running and overly simplistic momentum strategies. The latter are the main cause of market turbulence.
- yummyfajitas 11y ago
  Why would adding delays make the market less turbulent? The standard dynamical systems intuition says that adding delays creates instability. Think about how many stable ODEs have wildly unstable numerical solvers, at least when the step sizes are too high. Or in terms of project planning, if you have 2 day sprints, you can course correct every 2 days and rapidly approach a usable product. If you have 3 month sprints, you might spend 2.9 months building something totally wrong. 2.9 months of moving the wrong way will get you a LOT further off course than a badly planned 2 day sprint.
  - msellout 11y ago
    Enforcing a delay may reduce the incentive to increase speed at the cost of strategic complexity. If the turbulence is caused by the interactions of overly-simplistic momentum agents, then increasing the complexity of the agents will stabilize the market. This should hold to the extend that increased strategy complexity also increases the variety of strategies in the market. Think of the market as a liquid near boiling point. If the energy of the system increases too much, it makes a phase transition. To raise the boiling point, add impurities. This is a flawed metaphor in many ways, but it might offer a new intuition for you. Unfortunately, in the case of the market (and many systems) efficiency is the enemy of stability. If you prefer a project-planning metaphor: BigCo executives have caught Agile fever. They see that 2-month sprints are more effective than 2-year project plans and they've heard their competitors are finding great benefit from 2-week sprints. BigCo decides to leapfrog the competition and goes straight to 2-minute sprints. They've tested their engineers and found that 2-minutes seems to be a lower bound on writing a chunk of useful code. The executives declare that all engineers must report accomplishments and re-plan their next activities every 2 minutes in accordance with proper Agile workflow. Obviously, extreme speed is disastrous. I'm not saying to slow down the market to making an order once monthly. Just slow down from nanoseconds. If in doubt, build a small simulation. Simple agent-based models can produce very interesting phenomena.
    - yummyfajitas 11y ago
      Efficiency in the "efficient markets" sense is not instability - it is by definition perfect incorporation of all information into the price. Fast adjustments are not "energy" in any sense, and smaller but more rapid adjustments are in fact considered to be properties of an "orderly market" (to borrow SEC terminology). Your 2 minute sprint example has a problem with transaction costs, not rapid iteration. Rather than analogies, can you just state directly how adding latency will stabilize things?

vonklaus 11y ago

edit: levine article provides some good info.

amelius 11y ago

Of course the biggest problem is not coming up with a better (mathematically verified) scheme to run stock markets, but instead it is getting it accepted and implemented. Given the interests, I suspect this problem could be, for example, of the same level of difficulty as reforming gun laws in the US.

msellout 11y ago

A delay of 350 microseconds may very well make the market less turbulent and reduce the prevalence of "flash" crashes. Though the method of implementing the delay might not succeed, a forced delay would alleviate the arms race to lower latency algorithms. Lower latency means fewer computations and less memory, which means the strategy space is smaller. With enough players crowded into a small strategy space, the market becomes more frothy as periodically too many players collide on the same strategy. Placing a lower limit on latency allows a better balance between algorithmic complexity and latency. The strategy space will be larger and hopefully will be large enough that there's room for most everyone to try different strategies, making the market calmer. To get a sense for the mechanism of this phenomenon, check out the El Farol Bar Problem (https://en.wikipedia.org/wiki/El_Farol_Bar_problem https://en.wikipedia.org/wiki/El_Farol_Bar_problem). Unfortunately, IEX's proposed implementation of a delay is probably not as good as simply changing the precision of the exchange's clocks. If the exchange decided it would measure time only to the nearest second and orders occurring at the same second would be processed in random order, I expect that would be a better solution. Adding some randomness to the processing order at the 100s of milliseconds scale would go a long way to reducing front-running and overly simplistic momentum strategies. The latter are the main cause of market turbulence.

yummyfajitas 11y ago
Why would adding delays make the market less turbulent? The standard dynamical systems intuition says that adding delays creates instability. Think about how many stable ODEs have wildly unstable numerical solvers, at least when the step sizes are too high. Or in terms of project planning, if you have 2 day sprints, you can course correct every 2 days and rapidly approach a usable product. If you have 3 month sprints, you might spend 2.9 months building something totally wrong. 2.9 months of moving the wrong way will get you a LOT further off course than a badly planned 2 day sprint.
- msellout 11y ago
  Enforcing a delay may reduce the incentive to increase speed at the cost of strategic complexity. If the turbulence is caused by the interactions of overly-simplistic momentum agents, then increasing the complexity of the agents will stabilize the market. This should hold to the extend that increased strategy complexity also increases the variety of strategies in the market. Think of the market as a liquid near boiling point. If the energy of the system increases too much, it makes a phase transition. To raise the boiling point, add impurities. This is a flawed metaphor in many ways, but it might offer a new intuition for you. Unfortunately, in the case of the market (and many systems) efficiency is the enemy of stability. If you prefer a project-planning metaphor: BigCo executives have caught Agile fever. They see that 2-month sprints are more effective than 2-year project plans and they've heard their competitors are finding great benefit from 2-week sprints. BigCo decides to leapfrog the competition and goes straight to 2-minute sprints. They've tested their engineers and found that 2-minutes seems to be a lower bound on writing a chunk of useful code. The executives declare that all engineers must report accomplishments and re-plan their next activities every 2 minutes in accordance with proper Agile workflow. Obviously, extreme speed is disastrous. I'm not saying to slow down the market to making an order once monthly. Just slow down from nanoseconds. If in doubt, build a small simulation. Simple agent-based models can produce very interesting phenomena.
  - yummyfajitas 11y ago
    Efficiency in the "efficient markets" sense is not instability - it is by definition perfect incorporation of all information into the price. Fast adjustments are not "energy" in any sense, and smaller but more rapid adjustments are in fact considered to be properties of an "orderly market" (to borrow SEC terminology). Your 2 minute sprint example has a problem with transaction costs, not rapid iteration. Rather than analogies, can you just state directly how adding latency will stabilize things?