5 ms·

Someone will call this a submarine article for IEX but I don't think this is far, it was written as an oped by Dave Swensen, the famous head of Yale's endowme

Someone will call this a submarine article for IEX but I don't think this is far, it was written as an oped by Dave Swensen, the famous head of Yale's endowment fund. Just so the issue is clear, almost all hedge funds don't do active/passive also called maker/taker, but rather they pay a flat fee per share traded to their sell side broker. The sell side broker will then collect/pay the exchange fees. This means that the sell side broker has an incentive to post the order to a market that pays them the largest rebate rather than the market with the shorted queue. The buy side clients are not getting worse prices necessarily as you still need to fill orders at the NBBO. So the argument would be, why not post on the exchange with the shortest queue always. And the response would be that 1) markets move fast, and what is the shorted queue when the order is dispatched may not be the shortest queue when the order arrives. 2) Other markets may be more active, ie more orders routed to them first so the shortest queue may not be the best place to route at all. To be fair its not a consensus that the IEX approach is better than maker taker, there is no clear consensus as to what the correct approach is even when you take out the HFT opinions. In case anyone wants to see here's a link to the BATS cash equities execution quality page. https://www.bats.com/us/equities/market_statistics/execution_quality/ https://www.bats.com/us/equities/market_statistics/execution...

harryh 9y ago
Worth noting that the head of Yale's endowment fund and IEX's interests are aligned. The business model of IEX is to convince naive investors that high frequency trading is somehow screwing them and that they should choose to route their orders to IEX in order to avoid it. They then facilitate trading between these naive investors and large institutional investors (like Yale) who want to move large blocks of shares before the market moves against them.
- wbl 9y ago
  Parent is correct. Uninformed order flow is what HFT wants to trade against: people buying because they have cash and selling because they need it. HFT doesn't want to trade with people moving prices at the old prices.
mrchicity 9y ago
Most brokers charge some all-in commission per share to clients. If you take away the rebates, brokers will simply raise commissions to compensate. Whether a fee is passed through or not is irrelevant. Brokers don't pass through direct costs of exchange licenses, servers, development time on their algos, etc. but clients still end up paying for them. Odds are clients like the current system because they know exactly how much executing a 100k share block will cost in commissions. If they didn't, there are plenty of competitive equities brokers who will offer pass-through pricing. And saying the shortest queue is best makes no sense. Most exchanges with short queues have laughably low market share. The lines are short for a reason, because they get serviced more slowly. Otherwise it'd be free money for fast HFTs to fill those lines up and get trades before someone on another exchange.
- chollida1 9y ago
  My post and your post seem to agree on all the points you just made:)
minimax 9y ago
The real reason the article is unserious is because IEX is basically purpose built to game the execution quality metric they're looking at (effective spread... trade price vs NBBO midpoint). Imagine you built a dark pool that only executes at the midpoint of the NBBO. It would have a perfect "effective spread" score but contribute nothing to the displayed NBBO. That's essentially what IEX is. Their midpoint order type only has value because of the displayed liquidity at the other rebate-paying exchanges.

harryh 9y ago

Worth noting that the head of Yale's endowment fund and IEX's interests are aligned. The business model of IEX is to convince naive investors that high frequency trading is somehow screwing them and that they should choose to route their orders to IEX in order to avoid it. They then facilitate trading between these naive investors and large institutional investors (like Yale) who want to move large blocks of shares before the market moves against them.

wbl 9y ago
Parent is correct. Uninformed order flow is what HFT wants to trade against: people buying because they have cash and selling because they need it. HFT doesn't want to trade with people moving prices at the old prices.

mrchicity 9y ago

Most brokers charge some all-in commission per share to clients. If you take away the rebates, brokers will simply raise commissions to compensate. Whether a fee is passed through or not is irrelevant. Brokers don't pass through direct costs of exchange licenses, servers, development time on their algos, etc. but clients still end up paying for them. Odds are clients like the current system because they know exactly how much executing a 100k share block will cost in commissions. If they didn't, there are plenty of competitive equities brokers who will offer pass-through pricing. And saying the shortest queue is best makes no sense. Most exchanges with short queues have laughably low market share. The lines are short for a reason, because they get serviced more slowly. Otherwise it'd be free money for fast HFTs to fill those lines up and get trades before someone on another exchange.

chollida1 9y ago
My post and your post seem to agree on all the points you just made:)

minimax 9y ago

The real reason the article is unserious is because IEX is basically purpose built to game the execution quality metric they're looking at (effective spread... trade price vs NBBO midpoint). Imagine you built a dark pool that only executes at the midpoint of the NBBO. It would have a perfect "effective spread" score but contribute nothing to the displayed NBBO. That's essentially what IEX is. Their midpoint order type only has value because of the displayed liquidity at the other rebate-paying exchanges.