4 ms·

Their system is not fundamentally different from discrete trading, since they have delay lines going into and out of their servers. So while everything is cont

Their system is not fundamentally different from discrete trading, since they have delay lines going into and out of their servers. So while everything is continuous, if you want to observe the market, then do a trade, then observe the result of that trade, etc. there is maximum rate you can do this. This is what prevents front running[0], according to my understanding. Once you submit an order, no one can react to that information within a time greater than round trip latency to the servers. The problem with crossing at discrete intervals is that it introduces new kinds of strategic considerations that make it much more complex for people to play the "game". EDIT [0] For the sake of the pedantic, I mean front running in the sense of the article at the top of this page, not the legal sense. The article defines a notion of front running that maybe not everyone agrees with, but that is what I am referring to.

yummyfajitas 11y ago
This is what prevents front running, according to my understanding. Once you submit an order, no one can react to that information within a time greater than round trip latency to the servers. That's not correct. Front-running is the crime by which your broker trades ahead of you after you state your intent to trade. Your broker does, in fact, see your trades before they reach the market (the broker is actually the one pushing them to the market). It's mainly a crime because your broker has a fiduciary duty to act in your best interest, and because the broker occupies a privileged position as an intermediary, not because there is something inherently wrong with demand anticipation. Of course, it is correct that no one besides your broker has the physical ability to react to that information.
- JesperRavn 11y ago
  But if someone, somehow, developed a legal technical means to eavesdrop on the order you sent to your broker, and traded based on that, wouldn't it be fair to say that this is, in some sense, similar to front running? That is what the article is claiming, although the information is the information available at one exchange before it reaches another. And going on with this analogy, wouldn't it be the case that we would want to prevent this eavesdropping if possible, because it has a similar effect to actual frontrunning, namely that the intermediary captures the information rents associated with your knowledge of the order you are about to submit.
  - yummyfajitas 11y ago
    The purpose of laws against frontrunning is to enable you to have a trusted relationship with your broker. There is no benefit to creating a trusted relationship with your adversaries. Similarly, doctor/patient confidentiality laws are there to created a trusted relationship and make you comfortable admitting to your doctor that you had unprotected sex with lots of heroin addicted hookers in sub saharan Africa and you now need all the STD tests. In contrast, passing laws against journalists reporting on who visits hookers has no such benefit.
    - JesperRavn 11y ago
      I really don't care about the law. The point is that if front running was legal, brokers would try to find ways to guarantee to their clients that they wouldn't do it. Similarly, the guy in the article advertises his exchange as preventing the equivalent of front running at the exchange level.
      - mrchicity 11y ago
        Their ATS can only exist by free-riding on the public price discovery in displayed US markets under Reg NMS. They protect their customers from trading at "wrong" prices by letting traders on faster exchanges determine what the "right" price is for them. As a thought experiment, imagine IEX captured 95% of market share as a displayed exchange. The 350 microsecond delay wouldn't matter since it's applied to everyone and there would be no reference markets for them to price against. It'd just be another market with a slightly slow matching engine. Relative speed still matters so fast traders would have an advantage.
  - mrchicity 11y ago
    There's two sides to every trade though. Somebody wins, somebody loses. The orders on the other exchanges either belong to market makers or other uninformed traders. If you structured the market so market makers couldn't see order flow as quickly, they'd charge a larger spread to everybody. Right now they charge a tight spread so long as the incoming order is small because they know at least some of the time they can get out of the way or try to dump their shares when a big order comes in. That's good for the small guy. They wouldn't even be there for the big guy to hit if you changed the rules. Instead the sales trader would only see half the shares at the best price and end up paying multiple ticks just like he does now. If the orders on other exchanges are uninformed slow traders, they're going to lose either way, so we're really arguing over whether the savvy hedge fund or the fast aggressive HFT should get their money. If you're playing the game of making fractions of a tick, you're in the same execution game HFTs are in, so you better get fast.
joshu 11y ago
The problem with their system is that they are basically always lagged, but the instruments are also traded on other exchanges that aren't. Why would anyone go there?

yummyfajitas 11y ago

This is what prevents front running, according to my understanding. Once you submit an order, no one can react to that information within a time greater than round trip latency to the servers. That's not correct. Front-running is the crime by which your broker trades ahead of you after you state your intent to trade. Your broker does, in fact, see your trades before they reach the market (the broker is actually the one pushing them to the market). It's mainly a crime because your broker has a fiduciary duty to act in your best interest, and because the broker occupies a privileged position as an intermediary, not because there is something inherently wrong with demand anticipation. Of course, it is correct that no one besides your broker has the physical ability to react to that information.

JesperRavn 11y ago
But if someone, somehow, developed a legal technical means to eavesdrop on the order you sent to your broker, and traded based on that, wouldn't it be fair to say that this is, in some sense, similar to front running? That is what the article is claiming, although the information is the information available at one exchange before it reaches another. And going on with this analogy, wouldn't it be the case that we would want to prevent this eavesdropping if possible, because it has a similar effect to actual frontrunning, namely that the intermediary captures the information rents associated with your knowledge of the order you are about to submit.
- yummyfajitas 11y ago
  The purpose of laws against frontrunning is to enable you to have a trusted relationship with your broker. There is no benefit to creating a trusted relationship with your adversaries. Similarly, doctor/patient confidentiality laws are there to created a trusted relationship and make you comfortable admitting to your doctor that you had unprotected sex with lots of heroin addicted hookers in sub saharan Africa and you now need all the STD tests. In contrast, passing laws against journalists reporting on who visits hookers has no such benefit.
  - JesperRavn 11y ago
    I really don't care about the law. The point is that if front running was legal, brokers would try to find ways to guarantee to their clients that they wouldn't do it. Similarly, the guy in the article advertises his exchange as preventing the equivalent of front running at the exchange level.
    - mrchicity 11y ago
      Their ATS can only exist by free-riding on the public price discovery in displayed US markets under Reg NMS. They protect their customers from trading at "wrong" prices by letting traders on faster exchanges determine what the "right" price is for them. As a thought experiment, imagine IEX captured 95% of market share as a displayed exchange. The 350 microsecond delay wouldn't matter since it's applied to everyone and there would be no reference markets for them to price against. It'd just be another market with a slightly slow matching engine. Relative speed still matters so fast traders would have an advantage.
- mrchicity 11y ago
  There's two sides to every trade though. Somebody wins, somebody loses. The orders on the other exchanges either belong to market makers or other uninformed traders. If you structured the market so market makers couldn't see order flow as quickly, they'd charge a larger spread to everybody. Right now they charge a tight spread so long as the incoming order is small because they know at least some of the time they can get out of the way or try to dump their shares when a big order comes in. That's good for the small guy. They wouldn't even be there for the big guy to hit if you changed the rules. Instead the sales trader would only see half the shares at the best price and end up paying multiple ticks just like he does now. If the orders on other exchanges are uninformed slow traders, they're going to lose either way, so we're really arguing over whether the savvy hedge fund or the fast aggressive HFT should get their money. If you're playing the game of making fractions of a tick, you're in the same execution game HFTs are in, so you better get fast.

joshu 11y ago

The problem with their system is that they are basically always lagged, but the instruments are also traded on other exchanges that aren't. Why would anyone go there?