3 ms·

Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers?

by liuliu 6y ago

JumpCrisscross 6y ago
> Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers? No. Execution is matching a buyer and a seller. Settlement is handling payment. Clearing is re-assigning the securities. This isn't perfect, but it will do. Exchanges deal with execution. (About a third of trading occurs away from exchanges [1].) The rule in America is you can't execute, on or off exchange, worse than the national best bid and offer [2]. That number aims to catalog all on-exchange quotes. Once a trade is matched the exchange is done. Settlement is its own can of worms. This story is about clearing. The shares you bought need to get from their seller's account to yours. Then the shares you sold need to get from your account to their buyer's. When you bought and sold the shares, the cash and shares "appeared" in your account. That's a convenient fiction. Cash doesn't move instantly. And securities settle over days. While all of that is happening, a complex web of credit arrangements keeps everything stitched together. Those arrangements have costs and risks. One of them is the requirement to post collateral as a safeguard against a broker breaking its word [3]. When those collateral costs get high, for example, because your customers are all trading risky things with high collateral requirements, it can create a cash crunch. What's happening here has, to my knowledge, nothing to do with exchanges or execution. [1] https://www.nasdaq.com/articles/slicing-the-liquidity-pie-2019-02-11 https://www.nasdaq.com/articles/slicing-the-liquidity-pie-20... [2] https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer [3] "But I don't trade on margin!" No, you don't. But you're still a borrower of sorts from your broker. When you buy a share at 11AM and then sell it at Noon, you've sold a share your broker may not yet own. That's the credit risk between you and your broker. If your broker bought that share at 11AM and sold it at Noon, it sold a share it did not yet own. That's the credit risk between the broker and the clearinghouse. Clearinghouses are nice. They usually say "give us 2% of yesterday's closing price in Treasuries. If you fail to deliver on a trade, we'll sell your Treasuries--maybe all of them, across all of your collateral with us--and make your counterparty whole." But when assets get volatile, the clearinghouse may want more than 2%. So it asks for that. Per its contract. But you don't have that money. And shit, Suzie just bought and sold the same shares thirty-six times in the last minute.
- KirillPanov 6y ago
  These credit agreements are the finance world's version of what we geeks call "bufferbloat". https://en.wikipedia.org/wiki/Bufferbloat https://en.wikipedia.org/wiki/Bufferbloat

Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers?

by liuliu 6y ago

Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers?

> Aren't they always need to route orders to the exchange in order to obtain the best price on behalf of the customers? No. Execution is matching a buyer and a seller. Settlement is handling payment. Clearing is re-assigning the securities. This isn't perfect, but it will do. Exchanges deal with execution. (About a third of trading occurs away from exchanges [1].) The rule in America is you can't execute, on or off exchange, worse than the national best bid and offer [2]. That number aims to catalog all on-exchange quotes. Once a trade is matched the exchange is done. Settlement is its own can of worms. This story is about clearing. The shares you bought need to get from their seller's account to yours. Then the shares you sold need to get from your account to their buyer's. When you bought and sold the shares, the cash and shares "appeared" in your account. That's a convenient fiction. Cash doesn't move instantly. And securities settle over days. While all of that is happening, a complex web of credit arrangements keeps everything stitched together. Those arrangements have costs and risks. One of them is the requirement to post collateral as a safeguard against a broker breaking its word [3]. When those collateral costs get high, for example, because your customers are all trading risky things with high collateral requirements, it can create a cash crunch. What's happening here has, to my knowledge, nothing to do with exchanges or execution. [1] https://www.nasdaq.com/articles/slicing-the-liquidity-pie-2019-02-11 https://www.nasdaq.com/articles/slicing-the-liquidity-pie-20... [2] https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer [3] "But I don't trade on margin!" No, you don't. But you're still a borrower of sorts from your broker. When you buy a share at 11AM and then sell it at Noon, you've sold a share your broker may not yet own. That's the credit risk between you and your broker. If your broker bought that share at 11AM and sold it at Noon, it sold a share it did not yet own. That's the credit risk between the broker and the clearinghouse. Clearinghouses are nice. They usually say "give us 2% of yesterday's closing price in Treasuries. If you fail to deliver on a trade, we'll sell your Treasuries--maybe all of them, across all of your collateral with us--and make your counterparty whole." But when assets get volatile, the clearinghouse may want more than 2%. So it asks for that. Per its contract. But you don't have that money. And shit, Suzie just bought and sold the same shares thirty-six times in the last minute.

KirillPanov 6y ago
These credit agreements are the finance world's version of what we geeks call "bufferbloat". https://en.wikipedia.org/wiki/Bufferbloat https://en.wikipedia.org/wiki/Bufferbloat