Friday, 15 February 2019

General market stupidity

I always enjoy seeing a bit of market stupidity either in the press, paper, or policy. It reminds me
of the many stupid things I've done over the years. It is reassuring to not be alone in the world.

So imagine my joy when I hear about the free lunch theorem violation in the WSJ, "Brief Price Gaps in Stocks Cost Investors $2 Billion a Year" by our old friend Mr Cesary Podkul. Happy Valentine's Day and glory be to the great atheist in the sky.

WSJ graphic

So all those HFT firms that struggled, failed, had to sell themselves cheaply in 2016, they were just dumb? They forgot to eat their free lunch?

Mr Cesary Podkul is starting to inhabit a regular place in the silliness stakes, though he'll need to lift his game to catch my 51 stupid years of misdemeanours. I was about 15 years old when I figured out an LSE trading model with these Fourier things I'd learnt about that would grow to accumulate more money than planet Earth's money supply. The market data Mike and I hacked by bypassing the $0.10 a page update on stock prices from ViaTel in 1982 on his Amstrad PC wasn't so much the problem then. With dark parallels to that sordid tale, Mr Podkul is overly reliant on an improper interpretation in a new study for his study of that study is a case study for why studies outside your field of study should be studied further for studiously requiring study before you study. Let's meander on.

I remember Mr Podkul for the promotion of the fake WSJ IEX promotion hiding in a flawed study from, “Study Finds ‘Speed Bumps’ Help Protect Ordinary Investors” by Cezary Podkul. I meandered on that back mid last year with "IPCC wrong on climate change & SEC wrong on IEX." That was based around Dr Hu's flawed research paper published at SSRN, "Intentional Access Delays, Market Quality, and Price Discovery: Evidence from IEX Becoming an Exchange." You'd hope Mr Podkul would learn. Alas, not.

I noted back then,
"The paper highlights much of what is wrong with the academic approach to the financial industry. You take a bias and false premise and try to fit a certain outcome."
I could have said that again, but, hey, it's a blog, why pass up the opportunity to quote myself.

You'll find the two related papers the WSJ is giving dubious credit to here:
"Scaling of inefficiencies in the U.S. equity markets: Evidence from three market indices and more than 2900 securities", David Rushing Dewhurst, Colin M. Van Oort,  John H. Ring IV, Tyler J. Gray, Christopher M. Danforth, and Brian F. Tivnan, Feb 14, 2018; and,
the earlier work which shows more detail, "Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30", Brian F. Tivnan, David Rushing Dewhurst, Colin M. Van Oort, John H. Ring IV, Tyler J. Gray, Brendan F. Tivnan, Matthew T. K. Koehler, Matthew T. McMahon,1 David Slater,1 Jason Veneman,1 and Christopher M. Danforth
These are written in combination with the University of Vermont. They are copyright "The MITRE Corporation" which seems all too proud of their misdemeanours as you can see in the promotion on their web page:
(click to enlarge)
"More than $2B of Inefficiencies Found in U.S. Stock Market" they scream. That's a lot of loose change in the back of the couch. Despite the nice presentation, there is a fundamental problem here. If you think you have found something too good to be true, it is probably not true. It is not true.

As Mr Remco Lenterman tweeted:

(click to enlarge)

If only it was that simple. Amen.

Kipp Rogers, Mr @mechanicalmarkets, pointed out the wild implausibility of:
(click to enlarge)

Poor old study. Simply doesn't pass the smell test.

Market data, even direct feeds are a rearview mirror into the reality of the auction. We guess at the truth. The SIP is a delayed rendition of part of that. All of these systems have flaws and jitter as do the timing and transport systems for measurement and co-location.

If you study the timing between the ES mini and the SPDR, the simplest of arbs perhaps, you'll often figure the market data is faster than the speed of light. How is this so? Well, there are two reasons. Market data is only half the story, order processing and its associated propagation and games is another. Secondly, smart speculation with heuristics, statistics, and intelligence, artificial or otherwise, lowers the latency. Smarts improves latency with uncertainty. It is all part of your extended distribution of opportunity.

Remember, sometimes the SIP is faster than the direct feed too. I'm looking at you IEX, you dumb schmuck latency arb provider, you. Bad boy Brad. Down boy. Down.

Putting that aside, this study is pretty, petty, and shiny; but it is mainly about uneducated noise. Double entendre intended.

I'd also like to meander about the 3ms speed-bump that ICE is going to apply to silver and gold futures. That hall of mirrors argument for introducing inefficiency and poor market microstructure, on purpose as a "Hail Mary" substitute for a lack of growth, is also too stupid to waste too much of your time on. At least we financial types will have nice complexities to keep us all busy and unproductively employed.

Happy trading,

--Matt.

Saturday, 9 February 2019

"4" by Alexandre Laumonier - "Sniper In Mahwah"

What a lovely object to see in the mail!
Hauts de Seine

I'm working my way through Alexandre's book "4."

It is delightfully packaged and playfully written. The narrative style Alexandre uses draws me in. The compulsion to read more is strong in this one.

The machine translation I'm forced to use as an ignorant non-native speaker is a little inconvenient but it works well for me even if I'd be more comfortable with native English. AI is working well as my I lets me down.

I have a bit to go as it is slow going with my android/google translate from photographed images. Every extra page imaged and translated is a delight. I'm kind of enjoying the reveal of each page. It's very much a low-frequency game that helps distract from the wallabies eating the tomatoes this summer weekend in the land of Oz.

Alexandre has an extract titled "High-frequency trading networks" at Visionscarto. Here is the introduction for you,
"After the 6/5 works , Alexandre Laumonier continues his exploration of world finance with 4, a new episode of his investigations that has just appeared . This book is entirely dedicated to the history and techniques of the recent radio communication networks deployed by some traders to connect the financial markets with one another. The reason? Radio waves provide the opportunity for market data to switch from one exchange to another two times faster than optical fiber. Having a microsecond ahead of the competitor guarantees gains in what is called high frequency trading. A true ethnological and geographical survey, this immersion in the heart of European networks (mainly from London to Frankfurt) and American (linking New Jersey, Washington and Chicago) is like an epic story. 
Here is an excerpt from Chapter 3 of 4, devoted to the first ever microwave network in the United States for a trading firm."


The slight book weighs in at a little over 100 pages. I'm disappointed it is not 300 pages so I might enjoy a longer latency journey but 100 is about right for my manual imaging exercise. It is beautifully published with a seductive wide bookmark showing a silver embossed European microwave map with a grey Chicago-NY map on the flip side.

Enough for now. I have to get back to my phone imaging and translation exercise :-)

Thank you Alexandre for a weekend delight!

--Matt.

___________________

Postscript: I've finished reading "4" now. Quite the delight and highly recommended.

Lovely details and anecdotes that only someone as invested in the story as Alexandre could tell. Even those of us in the industry only have a hazy picture of experienced truths, rumour, and beer talk to go on. Alexandre fills in many details with enough fuzz remaining to keep us all curious.

Sniper touches on regulating heel sizes in trading pits, to the Chappe optical telegraph and stock scam, to William Heath on a bicycle, the "American Deer", being replaced by copper wire.

Some fun quotes, if you'll excuse the translation from French,
“Better to be first 99% of the time than second 100% of the time” 
Five years later, in Aurora, a microsecond required a $14 million investment.
Market data is now passing through the bell tower, neither seen nor known, and money from traders using McKay's network has indirectly helped renovate the church.
The presence of Jesus below the antennae of traders is common, the crosses having been, before the erection of the modern pylons, the highest structures arranged on the high points, for the same reasons as those justifying the presence of the parabolics in these places: to be visible from afar - this would make some say that, in the heights of the landscape, one religion has replaced another. 
While they were visiting the towers, the guys from Jump were asking the pilot to let the rotors spin, in case the authorities had disembarked and they had to clear off urgently. 
...the inhabitants of the neighborhood designate under the nickname of "penis." ... His erection was a technical feat...
Once on the platform, they noticed that large parabolics pointing to Frankfurt and London were already there. One of the toughest competitors of the American firm occupied the heights of the cathedral: the Canadians of Vigilant Global, who had surveyed Belgian territory with a length in advance.
rumors circulated that these officials would have asked high-frequency traders to run the restaurant in exchange for the installation of their parabolics
in addition to the blog he created to fight against the tower of Canadians, this computer scientist eventually wrote, printed and deposited at home neighbors of anti-pylon leaflets, he was cruelly bitten by a recalcitrant dog that prevented him from accessing a mailbox.
Thus, in Banana Land, the "battle of the two towers" began
The ending prose and pointed juxtaposition of two distant tribes colocating was a nice way to close a continuing saga.



Friday, 8 February 2019

Random meandering catch-up

Virtu / ITG


A few things interesting things have been happening why things have been busy/quiet here.

I see the Virtu / ITG deal has the regs done and is likely to close Q1, "Virtu Provides Update Regarding Acquisition of ITG."

This is a good out for both ITG and their customers. I doubt ITG was going to hit the plan numbers Mr Troise was espousing on each earnings call, so now they don't have to. It's good for most ITG customers as Virtu is an impressive outfit. They have much better tech than ITG which may help you'd hope. It's bad for ITG staff as their payroll has been bloated for years. It is at least 50% overstuffed with staff who may soon be stuffed. Virtu is an aggressively lean organisation, as KCG staffers will attest to, so perhaps only a quarter of staff are really needed? How deep to cut? Losing some ultrasensitive agency-only clients would then be much more palatable with a lower cost base.

The firewall between the prop biz and the broking should be safer with Virtu. In the old daze of ITG they just lied to their customers about their own trading and pretended it was an agency only business. I wrote about this a few years ago, "ITG continues to deceive customers." ITG's Frank Troise sensibly closed their prop business down, "ITG shutters prop trading business." The hits kept coming for ITG, from the $20M Project Omega mess, to $12M for the POSIT confidentiality leaks and misinformation, with the $24M for improper ADR handling in between.

ITG and their shareholders may have actually dodged a bullet. ITG prop traded for many years and lied to their customers about being agency only brokers. If the SEC had been wiser and a slightly more adept regulator they would have disgorged those tens of millions and put a juicy fine in their pocket too.

ITG was an ATS and algo pioneer. They did some exceptional work in the early daze. It aged. ITG became clunky. Their tech didn't work so well, but many of the buy-side remained. Sticky clients. Sub-standard tech and ridden by scandals. People were all too attached to their Triton terminals.

Virtu is buying those sticky clients. Some clients may run away, but they shouldn't. Virtu is sharper and should provide a better future. Many possible acquirers have run the ruler over ITG for many years. I've talked to a few. The danger of catching a falling knife has kept many away. The deal should work for Virtu as it can aggressively pare costs (aka staff), they seem a little smarter, certainly have much better tech to integrate, and thus Virtu's outcomes should be a better business. It is ironic that the buy-side seemed to trust the dodgy ITG and be wary of the Virtu HFT machine. It will be a leap for the buy-side to trust an HFT. The truth of the matter is different. Virtu's reputation is strong and ITG's was kind of sucky until Mr Troise started cleaning shop. New customers may actually find a reason to call on the embedded ITG again. That would be a change to just sticking around.

I suspect a win for Virtu.

DRW


As a bookend to the CFTC critical meandering, "CFTC vs DRW: regulator's ego explodes" I should note the conclusion. Mr Don Wilson scored a big win when US District Judge Sullivan wrote,
"It is not illegal to be smarter than your counterparties in a swap transaction."
Crain's covered it here, "DRW's Wilson scores big win in market-manipulation case." It took an inordinate time to conclude, as is the want of courts. The judge had a new job confirmed by the Senate so he had to clear the decks of what he could.

The CFTC does so much good work and then let some legal eagle's ego run away and allow a train wreck such as this. Even with such an obvious case, DRW had to risk much to litigate this to the mat. Good on them for not folding and holding the CFTC to account. There was a change in legal personnel at the CFTC. Heads should have rolled and they did. I doubt Mr Wilson got the apology he deserved.


Volatility is your friend


Around December there was much talk of computers exacerbating volatility on the downside. Very little talk about algorithms with upside volatility. That is the press norm.

What many people miss is that better information and models should lead to a more aggressive view of valuation from a bottom-up perspective. Think of the sum of discounted cash flows point of view. Share price should be very sensitive to initial conditions, i.e. today, whether that be earnings or new insight, macro or micro. We had the crazy volatility doldrums where any dope could make money selling vol until February 2018. Then we start blaming algorithms and computers.

The real story may just be that we are getting better at working out value. Thus prices incorporate information more efficiently. Sharper price changes result. That is, efficiency may just be volatility. Welcome to the new world.

I'm not convinced but it is interesting. I suspect noisy crap is just noisy crap. Signal is hard to diagnose.


Arista bought Metamako


I had a few beers with Charles and Scott after they baled with the sale back in September last year. Scott had just bought a new toy.
Scott Newham (left) and Charles "First time" Thomas (right)
Scott's new toy with two wheels.

Dave Snowdon and the rest of the team stayed on to play with their new Arista toys and teammates. This is significant in the HFT world as most profitable firms use their equipment. The newly named Arista 7130 is the go-to device for layer one.

It is a good deal for Arista. They get back to their financial service roots. I remember meeting Andy Bechtolsheim at the Roosevelt in NY many moons ago when Arista had a simple trestle table and a few pamphlets. I felt giddy shaking his hand. Geek I am. The crude marketing setup belied the $100M Andy personally sunk into the venture. It was the fastest switch at the time with Fulcrum's asynchronous wonder chip. Arista did well. They started by displacing Cisco with fast Fulcrum based switches that only did layer two. It was a while before Arista got to layer 3. Now they are getting into big iron routing which looks more like a huge switch in the 21st century.

Metamako displaced some Arista gear from financial services with clever layer one and some faster layer two, borrowing from the same Arista playbook.  The same plot worked well with new actors.

The Metamako deal opens some doors for Arista. Metamako's plans have a great enabler in Arista with their super-sized resources. The tango looks sweet. I suspect a happy ending. Well done all.


Personal note


Not the best year last year. Not sure where it went. Marriage nailed shut. Aged mum has lurched from stroke, recovery, cancer, recovery, to death by dementia over the last couple of years. Not a great route but an all too familiar sadness for so many. Dementia became the largest killer of women in Australia in 2018. We should do something about that.

An old high school friend, Mardi Dungey, who was a Professor of Economics for a while at Cambridge before coming home to a Professorship at the University of Tasmania got a shock diagnosis late last year and a sad memorial last Friday. She was one of the good ones. Fiftyish is way too young. Life is fragile.

My old father survived his carotid artery surgery three weeks ago and recovers slowly. Then the fires came to the Huon Valley just as the flood renovations were completing.
A firestorm brewing beyond the front yard.
Lucky with winds at the end of the day.
Death threats make for a welcome sunrise

Relying on high latency canaries for fire signalling
Roads opened up again today. An inch of rain yesterday may have had something to do with that. A few houses were lost but the impressive fire-fighters largely won their battle.
Smokey river. The old man has steroids for an asthmatic cough now.
I'm waiting for the 'roid rage to kick in.
A bit less smoke
All clear again
The canaries were stood down from alert duty today. Sadly, one juvenile was lost.
Though it was nastier when the tiger snake took three young ones a couple of months
ago. Stupid tiger snake died a death of gluttony as he couldn't escape the cage.
He met a garden implement.

Normality instead of this shitty leptokurtosis would be nice for five minutes. I guess things are different here: our black swans have white wing tips:

What distribution can be derived from black swans with white wing tips?


Happy trading and let's all have a good 2019,


--Matt.

IEX 2019 - *sigh*

IEX is a nasty business.

The expensive dark exchange, which is still not a restaurant, continues to push false rhetoric and mislead investors. Nothing new there. This time it is spurious indignation surrounding market data.

IEX is a small exchange with such poor execution it is surprising brokers have not yet been prosecuted by the SEC for a lack of best execution for routing orders to IEX. When will the SEC honour its regulatory obligations? A fair-minded person would see the SEC needs to prosecute for false and misleading statements or a lack of best execution.

I've covered much of this silliness in pieces such as "IEX's Data Core delusions."

Nasdaq added to this noble cause by publishing a piece worth reading on IEX's poor execution quality here: "Three Charts Dispel the “Price Improvement” Myth."

IEX has lied to the market and its users in many ways. I've meandered about this many times before but then IEX pipes up with a fake narrative around market data which should annoy any market professional. It has annoyed me enough to call out their continued fakery yet again.

In a very old meander about speed bumps, "Speed-bump 101", IEX's speed bump weakness is covered. Not having a fair co-lo is normally enough to give the well endowed an advantage but that is not enough for IEX. IEX enables the worst exchange latency arbitrage play within the US NMS by delaying market data to their customers despite enabling immediate SIP updates. Oh dear, IEX. The latency arb enabler truth does not align well with IEX marketing.

IEX doesn't allow you to trade fairly when the market is changing. You'll be prevented from trading or penalised with a high transaction price. That high price is more often charged for no reason as their crumbling quote indicator is often wrong. This mechanism also makes their fee unauditable as not only do you not know what you may be charged apriori, the lack of visible determinism means you may not even calculate your fees correctly post hoc. A sad state of affairs.

IEX offers rebates, which they call discounts, if you qualify. Yet their rhetoric on others' rebates was misguided and insulting as they sought to carve out a marketing advantage without fair reason.

IEX market data is pretty useless. Not only is it delayed, but the uselessness is extended by often avoiding a proper representation of NBBO due to its lack of market best quotations. The market data is free which is good. Perhaps you get what you pay for here. It is certainly useful if you want to get an approximate idea of where the market is, but you have a smartphone for that too.

BATS market data used to be free. This was a very good deal. Eventually BATS started charging for market data. Dave Cummings signalled disappointment that BATS did this. It was a shame.

The inelasticity of demand has caused exchanges to pump up market data fees at a rate which is far from reasonable. There has been much noise about this and finally the cries SIFMA et al cut through and the SEC has pushed back on the exchanges unjustified fee rises. This is how it should be.  That inelasticity in demand, you don't have to trade everywhere but you need market data from everywhere, insists that market data prices need to be regulated.

So IEX jumps on this bandwagon and steps too far. They write a hit piece on how inexpensive their two-bit exchange delivers somewhat useless market data and falsely compares that to real exchanges. There is much that is disgusting in that piece but also a little bit of truth, however slender. It is true the exchanges have bled that demand inelasticity too far and they need to be regulated, but stupid numbers from IEX do not make them the white knight that will save us. IEX remains not only a terrible exchange to trade at but an exchange that continues to have a mendacity problem. IEX  cannot help itself but mislead further.

*sigh*

Anyhow, now I've got that out of my system. Let's meander through where IEX currently sits in the market space.

First of all, the Nasdaq v IEX patent lawsuit rolls on. The settlement conference failed as expected. Judge Martinotti granted IEX's dismissal of the induced infringement claims but denied IEX other dismissal requests in an opinion filed on January 4th. Nasdaq filed a 67 page amended complaint on January 25th which continues to demand a jury trial.

If you squint it looks like IEX market share continues to grow, albeit slowly, as it continues to strive for a monthly average of 3% but continues to fall short:
(click to enlarge)

To IEX's credit, there have been a couple of days when less than 70% of its handled volume not lit. Not exactly something to be proud of, but some progress. Nevertheless, the sad exchange is still averaging about 25% of the handled volume being lit as you can see below. January slipped back to 23.6% of handled share volume being lit. It is an expensive dark place indeed.

Happy trading,

--Matt.


(click to enlarge)






Thursday, 24 January 2019

The Wizards of Oz - HFT

The Australia Tax Office publishes the income and tax paid by medium to large private companies. This gives some insight into a few firms, including the occasional HFT firm.

It's old news. I tweeted those results back in December but some meanderers may like to meander over the information too. This is for the year 2016/17, so it's a bit dated.

(click to enlarge)

SIG is split into two for the stuff they can get away with attributing with less ire to Ireland's sandwich economy.

Here is the prior info for the 2015/16 year:


The land of Oz is a wonderful place to be.

Happy trading,

--Matt.



MemX - it's also about governance

I received a few nice bits of feedback from yesterday's MemX blog:
  MemX - what it's really about

One bit of sage advice I received in a private message was a MemX investor rationale may just be governance or a seat at the table.

That was a way too kind way of saying, without the Mr T voice, "Ya dumb fool, can't you see some of those guys are retail and payment for order flow (PFOF) or otherwise indirect institutional trading?" That is, Ameritrade, Charles Schwab, E-trade, and Fidelity mostly represent retail end-points. Aside from their mutual fund oriented institutional orders, that group represents much of the retail payment for order flow traffic that never hits an exchange. Not so much an order flow securitisation model for those entities.

Mea culpa.
Source: sticky comics

You see, sometimes a nudge via the internet rather than abuse does actually work ;-)

Virtu and Citadel are two of the biggest PFOF service providers. Thus PFOF interested parties make up a good majority of the board. This is not nefarious but reasonable. Especially in a marketing governance sense. Ameritrade, Schwab, E-trade, and Fidelity all are as good custodians for their retail representation.

PFOF is an uncomfortable virtue of Reg NMS. Such activity is frowned upon or outright banned in most other global jurisdictions of significance. PFOF is a somewhat oxymoronic abrogation fulfilment of best execution duties. Wouldn't the retail customer be better off if the broker didn't pay someone else to execute? Couldn't the retail broker pass both that fee they pay and the PFOF service providers profit on to the customer? Well, no. Reg NMS prevents sub-penny ticks and until the SEC gets off its collective gluteus minimus and allows such, preferably through variable tick sizes, PFOF remains a valid way of benefiting retail via sub-penny price improvement.

  Meanderful: Sub-pennies rule!

Nevertheless, MemX's success will be tied to the success of order flow securitisation from participants as incentives do work. I prefer the governance spin on the indirect market participation. It is certainly kinder than a spin suggesting they are being paid for a lack of agitation. Let's call them astute investors who understand the game. A hedge against a potential regulatory diminishing of PFOF is also a smart play.

Once the SEC is less shutdown it would be nice to see it focus on the worthwhile. Perhaps a variable tick size introduction that includes sub-pennies, rather than the unfortunately dumb and slightly silly fee pilot crapola? For the fee pilot, the most likely outcome remains an enduring argument about meaning or the lack thereof. One would hope you wouldn't operate on a plane in flight without a more careful calibration of potential outcomes and unintended consequences.

Maybe that is expecting too much of a crazy cat lady SEC. The SEC is the owner of the Crazy CAT.

With billions of future value on the table, expect more order flow providers and capital heavy astute governance providers to join MemX once the reification of abstract potential is more certain. Increasing rounds will suit founders and new capital alike.

Even if we can sometimes come together for common good with good honest fair play and altruism in our hearts, messy creative destruction still seems better to me than the friendly stasis a socialistic mutual creates in this context. However minor, we also have to keep innovation in our hearts. Death through irrelevance and inefficiency is wholly unpleasant.

Happy trading,

--Matt.

Wednesday, 23 January 2019

MemX - what it's really about

MemX is the recently announced pending exchange proposal with support from:

  • TD Ameritrade
  • BAML
  • Charles Schwab
  • Citadel
  • E-trade
  • Fidelity
  • Morgan Stanley
  • UBS
  • Virtu 

Much of the initial press coverage remarks market participants are frustrated by the fees charged by the larger venues, so - bada-bing - MemX.

Like all incomplete truths, that is a fair rationale but insufficient on its own. There is another important motive the founding firms are less direct about. Let's meander on.

IEX promised simple order types, a fair venue, straight forward pricing and delivered an expensive platform that is largely opaque, very uneven and unfair, discourages risk management during times of change, and, perhaps worst of all, probably violates best execution requirements for many lit orders that get routed to it. Not a fan.

Many sensible participants recognise IEX's shortcomings and keep their order flow away. IEX is thus stuck with a low market share bouncing around a little under three per cent. Fee extortion allows it to be abnormally profitable for a jumped up two-bit bucket shop. Not a great long term plan.

Luminex is another cautionary tale. It is an effort from the buy-side to create their own walled garden where similarly motivated types could trade with each other. It looks well run from the outside but the volumes have been dismal. As I discussed in Liquidity Dancing, it takes two to tango but Luminex dad-dances to the sound of one hand clapping. Diversity is a good thing for markets. You don't want to build a trade wall.

MemX is making sensible noises about good tech, simple order types, low fees, et cetera. So did IEX. I suspect MemX means it though. We'll wait and see.

Order flow securitisation


MemX is also about order flow securitisation. The venue will be successful if and only if it attracts large order flow providers. A venue is more likely to be successful if those order flow providers are incentivised to work with the platform.

Chi-X Europe (then BATS Europe, now CBOE) grew well because performance warrants allowed order securitisation. It also had a fee advantage and decent tech relative to the incumbents. Still, it wasn't easy. Virtu (nee Getco) drove much of the early order flow thanks to those warrant incentives. Tony MacKay also did a good job of lobbying the buy side to get their brokers to route to the venue.

Dave Cummings rode a similarly strong order flow securitisation rationale with BATS. BATS was a direct equity stake model rather than using performance warrants. Successive investment rounds at increasing valuations allowed further incentives, such as negative pricing periods, which encouraged recalcitrant firms to connect up.

BATS' Market data was free. The business ran with close to a balanced budget before SIP fee cream sweetened the pie. Dave Cummings is on public record as saying he was disappointed that BATS eventually went to a paid market data model. It will be interesting to see if MemX keeps market data free. I suspect it will.

As per Island, Archipelago, BATS, Chi-X, Direct Edge, the end game will be for a large exchange to buy MemX down the track. One exchange group will do so to protect that slab of market share from falling into the hands of the competition.

The members will then wait a suitable period, as they have post BATS, then rinse and repeat.

Is this a bad thing? I think not. The platform will not succeed without a good game. Best execution regulations obligate that and sometimes partially succeed.  That is, MemX will need a mix of tight technology, fair fares, and meaningful market microstructure to make sense. All these aspects in isolation are necessary but insufficient. It takes a full palette to make an interesting picture.

There are some other innovations that could make sense, but they are, at the end of the day, unnecessary. Good tech, low fees, simple order types, and a fair co-lo will win the day when the carrot of order flow securitisation focuses the mind. Expect the church of MemX to broaden if the execution platform's executives execute excellently - or not too terribly.


Happy trading,


--Matt.
______________

Update: see MemX - it's also about governance


Tuesday, 22 January 2019

US Finra ATS Stats - rounding out 2018


It’s been interesting to see Trade Web’s growth correspond to a small, gradual reduction in its large average trade size. BIDS has had the opposite experience with growth from a gradual increase in its modest average trade size. Luminex continues to prove that a walled garden, even if run well, is not the best idea.

ATS share
click to enlarge

ATS share
click to enlarge

# ATS ATS T1 share % Volume Trades Avg trade size Δ
1 UBSA UBS ATS 20.13 438.5 M 2,953,078 148
2 CROS CROSSFINDER 10.49 228.6 M 1,328,081 172
3 MSPL MS POOL (ATS-4) 6.81 148.4 M 664,769 223 +1
4 JPMX JPM-X 6.80 148.0 M 814,971 182 +3
5 EBXL LEVEL ATS 6.70 145.9 M 697,432 209 -2
6 DBAX SUPERX 6.29 137.1 M 739,244 185
7 SGMT SIGMA X2 6.15 134.0 M 882,992 152 -2
8 LATS BARCLAYS ATS (“LX”) 5.55 120.8 M 611,025 198
9 BIDS BIDS TRADING 3.88 84.4 M 102,243 826 +2
10 DLTA DEALERWEB 3.21 69.9 M 246 284,177 -1
11 MLIX INSTINCT X 2.90 63.2 M 268,159 236 -1
12 ITGP POSIT 2.86 62.4 M 220,707 283 +1
13 ICBX INSTINET CONTINUOUS BLOCK CROSSING SYSTEM (CBX) 2.50 54.4 M 282,169 193 -1
14 MSTX MS TRAJECTORY CROSS (ATS-1) 2.43 52.9 M 263,416 201
15 JPBX JPB-X 1.66 36.2 M 318,185 114 +4
16 IATS INTERACTIVE BROKERS LLC 1.66 36.1 M 148,504 243 -1
17 KCGM VIRTU MATCHIT 1.58 34.4 M 176,018 195 -1
18 MSRP MS RPOOL (ATS-6) 1.52 33.0 M 225,881 146 +2
19 XSTM CROSSSTREAM 1.27 27.7 M 86,957 319 -2
20 CXCX CITI CROSS 1.20 26.1 M 125,514 208 -2
21 LQNA LIQUIDNET H2O 1.05 23.0 M 1,562 14,699
22 BLKX BLOCKCROSS 0.88 19.2 M 1,697 11,315
23 CODA CODA MARKETS, INC. 0.61 13.2 M 54,446 242 +1
24 XIST INSTINET CROSSING 0.49 10.6 M 2,835 3,731 -1
25 LQNT LIQUIDNET ATS 0.47 10.2 M 369 27,628 +1
26 INCR INTELLIGENT CROSS LLC 0.37 8.2 M 27,012 302 -1
27 LMNX LUMINEX TRADING & ANALYTICS LLC 0.27 5.9 M 247 24,037
28 CBLC CITIBLOC 0.23 5.1 M 312 16,256
29 PROS PRO SECURITIES ATS 0.01 0.2 M 494 407 +1
30 USTK USTOCKTRADE SECURITIES, INC. 0.01 0.2 M 1,102 180 +2
31 AQUA AQUA SECURITIES L.P. 0.01 0.2 M 43 4,358
32 WDNX XE 0.01 0.1 M 194 645 -3

ATS share
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ATS share
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ATS share
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Wednesday, 22 August 2018

Vale Mum

Helene Kaye Hurd, 8.8.1942 - 22.8.2018

Dementia is an insidious beast and worthy of respect and support as I hope this will be a forgetful memory of a disease in twenty years hence. It is, for now, the leading cause of death of Australian women.

Dementia Australia

All the best to those out there still waging the war.

--Matt.

Thursday, 9 August 2018

Further legal exposure exposed in new ITG filing

In addition to employing too many people for the services offered, ITG has added some indication of further legal rumblings it hopes may soon be behind it. Once again, POSIT is the subject of historical meandering over at the SEC. 

A $12M charge has been taken as an expected legal hit, with a little more in fees. The Gasser suits still awaits. A class action was settled but the insurers take the $18M hit with future insurance premiums unlikely to go down. It also seems the IIROC has not connected the dots on the historical games in ITG's Canadian biz which is curious.

ITG chart: yahoo source
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GAAP loss of $3M for this filing.

--Matt.
______________________

From the 10-Q Edgar filing at the SEC:

(19) Contingencies – Legal Matters
The Company is presently engaged in discussions with the SEC staff regarding a possible resolution of an investigation relating to the operational features of the U.S. POSIT alternative trading system and access to U.S. POSIT data, together with certain related disclosures.
With regard to the operational features of U.S. POSIT, the potential resolution is focused on: (i) the technological infrastructure supporting the matching engine from 2010 through mid-2014, which affected the ability of mainly clients engaged in low-latency trading to interact with other POSIT flow and (ii) a delay feature added in 2014 to ITG’s Liquidity Guard anti-gaming technology designed to prevent latency arbitrage by temporarily preventing day orders submitted by certain clients engaged in low-latency trading from interacting with day orders from other clients.  The potential resolution is also focused on: (i) overbroad internal access to, and internal sharing of, U.S. POSIT data, (ii) between October 2010 and July 2015, the sharing of anonymized lists of the top 100 symbols executed in U.S. POSIT and the top 100 symbols sent to U.S. POSIT as immediate-or-cancel orders on the prior trading day mainly with clients or prospective clients engaged in low-latency trading, (iii) between June 2009 and November 2017, the sharing of a venue analysis report that contained up to 15 symbols (and associated aggregated, anonymized volume) executed in U.S. POSIT on the prior trading day with users of the Company’s algorithms and (iv) instances of sharing of anonymized U.S. POSIT execution information with clients.
The Company has taken meaningful remedial actions during the course of the SEC’s investigation, including imposing additional limitations on access to U.S. POSIT data as well as enhancing POSIT’s Form ATS and other disclosures.
While the Company is engaged in discussions with the SEC staff to resolve the investigation, there can be no assurance that these discussions will be successful. Based on recent discussions, the Company incurred a charge of $12.0 million during the three and six months ended June 30, 2018 to establish an accrual for a potential settlement of this matter. The SEC staff has indicated that they will recommend this penalty amount to the Commission. The Company also incurred approximately $0.2 million in legal fees associated with this matter during the second quarter of 2018.  Resolution of the matter is subject to further discussions with the SEC staff and agreement with the SEC staff on the terms of a settlement, which would be subject to review and approval by the Commission. The Company cannot predict the timing of any settlement or the ultimate resolution of the SEC investigation.  It is possible that a materially higher amount than the amount accrued could be required to achieve a resolution of the matter. In addition, the Company cannot predict the impact that the matter may have on its business going forward.
In addition to the above, the Company’s broker-dealer subsidiaries are subject to, or involved in, investigations and other proceedings by government agencies and self-regulatory organizations, with respect to which the Company is cooperating. Such investigations and other proceedings may result in judgments, settlements, fines, disgorgements, penalties, injunctions or other relief. Given the inherent uncertainties and the current stage of these inquiries, and the Company’s ongoing reviews, the Company is unable to predict the outcome of these matters at this time.
The Company is not a party to any pending material legal proceedings other than claims and lawsuits arising in the ordinary course of business, except a putative class action lawsuit and a derivative action have been filed with respect to the Company and certain of its current and former directors and/or executives in connection with the Company’s announcement of the SEC matter described in the following paragraph (and other related actions could be filed).
On August 12, 2015, the Company reached a final settlement with the SEC in connection with the SEC’s investigation into a proprietary trading pilot operated within AlterNet for sixteen months in 2010 through mid-2011. The investigation was focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of Company policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.  According to the terms of the settlement, the Company paid an aggregate amount of $20.3 million, representing a civil penalty of $18 million, disgorgement of approximately $2.1 million in trading revenues and prejudgment interest of approximately $0.25 million. 
In connection with the announcement of the SEC investigation regarding AlterNet, two putative class action lawsuits were filed with respect to the Company and certain of its current and former executives, which were consolidated into a single action captioned In re Investment Technology Group, Inc. Securities Litigation before the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants made material misrepresentations or omitted to disclose material facts concerning, among other subjects, the matters that were the subject of the SEC settlement regarding AlterNet and the SEC investigation that led to the SEC settlement. The complaint seeks an unspecified amount of damages under the federal securities laws. On April 26, 2017, the court granted in part and denied in part the Company’s motion to dismiss the complaint and granted the plaintiff leave to file a motion to amend its complaint. On June 12, 2017, the plaintiff filed a motion to amend its complaint against certain of the individual defendants who were dismissed from the case in the court’s April opinion. On March 23, 2018, the court denied plaintiff’s motion to amend, thereby affirming its dismissal of certain of the individual defendants from the case.
On April 19, 2018, the Company reached an agreement in principle to settle the consolidated securities class action lawsuit. In exchange for a release of claims and a dismissal with prejudice, the settlement includes a payment to class members of $18 million, which is well within the policy limits of, and is expected to be paid by, the Company’s insurance carrier. The condensed consolidated statements of financial condition as of June 30, 2018 include a payable to class members of $18.0 million in accounts payable and accrued expenses (also, see Note 11, Accounts Payable and Accrued Expenses) that is fully offset by a receivable from the Company’s insurance carrier in other assets. As a result, the settlement is not expected to impact the Company’s results. The settlement reached is solely to eliminate the uncertainties, burden and expense of further protracted litigation and does not constitute an admission of liability by the Company or its current or former executives or directors.  Specifically, the Company and its current and former executives and directors deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The parties anticipate entering into a final settlement agreement outlining the complete terms of the settlement. The settlement is subject to certain conditions, including, among others, preliminary and final court approval and notice to the class of plaintiffs in the lawsuit. There is no assurance that a final settlement will be completed, court approval will be obtained or that class member participation will be sufficient.
On November 27, 2015, a purported shareholder of the Company filed a shareholder derivative action captioned Watterson v. Gasser et al. against eleven current or former officers and directors of the Company in the Supreme Court for the State of New York. The Company is named as a nominal defendant, and the plaintiff purports to seek recovery on its behalf. The complaint generally alleges that the individual defendants breached their fiduciary duties to the Company in connection with the matters that were the subject of the SEC settlement regarding AlterNet.
While the Company cannot predict the outcome of the derivative lawsuit, the Company intends to defend it as appropriate. No reserve has been established for the derivative lawsuit since the Company is unable to provide a reasonable estimate of any potential liability given the stage of the proceeding. The Company believes, based on information currently available, that the outcome of the derivative lawsuit will not likely have a material adverse effect on its consolidated financial position.  In light of the inherent uncertainties of such proceeding, an adverse outcome may have a material impact on the results of operations for any particular period.

Monday, 6 August 2018

Tempest reminder

Yup, tempest is still a thing, even for LCDs. No, it's not an urban myth. Through walls. Even tens of metres away:



H/T to Mr Newham. It's getting a lot more accessible. Be aware and beware,


--Matt.

Saturday, 4 August 2018

The secrets to OSE option trading and the Canadian interlisted arb

The Kickstarter for "The Accidental HFT firm" closes in twenty-something hours.

The Korean trading will get some more meat on the bone beyond the original piece. We'll have a new meander around how successful trading can work for futures and options at the OSE for the Nikkei-225. This was a feat my old firm failed at after I left. Silly people. It wasn't that hard. We'll talk about the main elements of success for OSE. As a tease, hardware was no help. Tricks were more important than low latency hardware. You'll find out why.

In Canada, the accidental firm struggled to successfully make markets in the first instance. However, a nice solution was dialled in that lead to that accidental 13-and-a-bit per cent of RIM trading in a day from my home office in Duffy's Forest, Sydney. We'll talk about what made the difference. It may be interesting for you.

There will be a few more details on how the implied vol was modelled plus the details on the trading strategy which was used to do over a million index options a day in the KRX. Some people have asked for great technical detail and others have asked to keep it simple, so I'll attempt to break out the technical bits to provide the wanted detail without polluting the stream.

The Zeptonics saga, the development of dedicated hardware, becoming the world's fastest switch, the ATS that nearly was, and the corruption in court we encountered that ultimately sunk it. This includes the drunk appeal judge, the dis-Honourable Judge Gilmour who unusually retired early this year in March 2018. The registrar that refused to step aside and acted in favour of his acquaintances. Judge Michelle Gordon's compromised actions, adultery, political favours, work liaisons, eventual recusal, and then an unjustified appointment to the High Court. An action that was answered before it was served due to the leaking from the court. The court of review that refused to hear about the continual and knowing mendacity from the opposing solicitor Matthew Critchley. Just the tip of the iceberg. Favours, friends, and corruption in the law and the judiciary. No surprises but an interesting, if twisted, tail to the tale. Intriguing for a brief meander, but the book is about trading, not the legal saga.

The good news story about stepping aside from Zeptonics to let an investor take on the old hardware team giving birth to the success of Metamako. We'll hear about the lead-up, but not the details there. That is for others.

We'll hear about risk, strategy adaption and combinations. A brief mention of how to make FPGA market data feeds better, by request, as part of the hardware story. We'll have a fireside chat about market microstructure and what I think makes for a good exchange. It may be worth pointing out some opportunities that still exist in that space.

Life is stranger than fiction sometimes. I hope you will enjoy it.

Happy trading,

--Matt.




Thursday, 2 August 2018

July NMS action - plus IEX lowlights

July 2018 was a meandering month for NMS exchanges. Volume started out pretty low thanks to some thoughts of Independence. I can't imagine why a revolution in government may seem relevant today still.

Average turnover for July from the exchanges was $304.66 billion per day. A bit lower than June's $350.10 billion but still higher than typical. Not quite the ten-year peak we saw on one day in February of $699.83 billion. The tension between trade wars, tech, and summer ho-hum is set to continue.
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 You can see in the following leptokurtic chart, showing a normal in red, that volume at over $300 billion per day remains strong despite the feelings of summer and the decay since the February vol explosion:

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 We're out around the 80% mark. Above a credit but not quite a high distinction:
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IEX's month


IEX continue their noisy irrelevance. 79.9% of handled volume at IEX was not lit. Dark and expensive and still not a restaurant. The usual charts are below.

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The Data Core scandal at IEX percolates along. I hear there are some peeps on the IEX Exchange's board that didn't know about it and also don't particularly think it is the wisest move, which is wise.

IEX cloud a few issues in their relations between the group holding company and the exchange, as has been highlighted in the ongoing Nasdaq patent case. That also continues in the operational side of the business with exchange employees soliciting for the Data Core expansion as you may see in the advertisement to the right.

IEX's credibility issues are further highlighted in a recent filing I avoided meandering about. This particular filing attracted a bit of attention after Mr John McCrank was duped a little by the IEX spin in the filing, "Proposed rule change to revise the threshold for imposition of the Crumbling Quote Remove Fee.

IEX claims they're narrowing their crummy Crumbling Quote, that usually means the opposite. Yet the applicability is both a broadening (removes minimum threshold) and a narrowing (specific ports). You could argue about the nett effect in a Liskov substitution principle kind of way but the real arbiter is that it raises more money, expected to be over $80k per month, thanks to removing the 1M share threshold. That would be a broadening then.

Tweet source (click to enlarge)
The filing's dubious spin highlights some of the problems in IEX's approach. Firstly, the overall thing is meh, where they are adding a bit of a mud to their pig and it remains a pig. They are staying true to their dubious principle of preventing people managing risk as prices change by doubling down on the usually wrong and unauditable crumbling quote signal. The larger issue is how IEX bend themselves out of shape, stretch reality, and write such a long filing for such a simple change. I'd like to see the SEC simply turn back a filing one day due to it being too long. 

Mr McCrank's tweet is reasonable as the exchange's filing's notes they receive 18.2 per cent of its marketable orders in brief periods, you know, those periods where prices change. However, it's an unfortunate regurgitation of IEX's weak spin. It's just the way markets work. Activity is centred around those fleeting moments prices change. IEX seems surprised by this as they try to prevent their clients managing risk at those times. Perhaps IEX are in the wrong industry? Overall, this artifice deceives clients by artificially spiking some statistical measures whilst costing those clients money with poor execution at the same time. If best execution was really a thing it seems unlikely IEX would trade at all.

IEX also tripled their spread crossing fee from $0.0003 to $0.0009, "Proposed Rule Change to Increase the Spread-Crossing Eligible Remove Fee to $0.0009 per share for Executions at or Above $1.00 that Remove Non-Displayed Liquidity." Maybe that will lift volumes for them?

In other IEX news, Mr Alexander Osipovich writes in the WSJ, "IEX Exchange Has Wall Street Fame But No Listings". Well, I would suggest infamy, rather than fame, but that's me for you :P Some quotes:
But so far, IEX has failed to list any companies, despite approaching hundreds over the past several years, including household names such as Amazon.com Inc.,  Starbucks Corp. and air carrier United Continental Holdings Inc., people familiar with the listings effort said.
... 
Four years ago, The Wall Street Journal reported that IEX told investors it hoped to list as many as 250 companies by 2017. By last year, IEX was telling some people that it would initially have around a half-dozen. 
“As the ‘Flash Boys’ aura faded, listed companies increased their focus on the details of IEX as a listing venue and they came away unimpressed,” said former NYSE Group President Thomas Farley.
I can't imagine a CFO deciding an IEX listing solves any problems with its rules, risk of rule change, vendor risk, Wynn #metoo aftermath, along with IEX's spin and mendacity problems. A job risk for a CFO. A very dubious proposition. 

Happy trading,

--Matt.



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