Monday, 8 June 2020

Patent magic and voodoo

Mike Nicholls linked to an interesting article by a patent broker where the patent broker Mr Louis Carbonneau described from his perspective, "What makes a patent valuable; A patent broker’s perspective." It was a useful perspective. Mike was asserting in a tweet that start-ups may spend unwisely on patenting/IP:

Mike is right, but I nevertheless pointed out that some fairly worthless patents can be valuable when it comes to litigation. This is mainly due to a broken litigation system, not the patent system. You know the story you'll hear all too many times, we have twenty patents you have ten, you pay us $X we agree to cross-license or royalties or some such and everyone moves on. 

It kind of makes no sense that the number of patents makes a difference, it often doesn't, but sometimes it does. This comes back to the truth that the law makes little sense outside it being a contract resolution system. It is not a justice system. More often than not, having dollars to proceed on the defence or attack is the determining variable sadly. Also, sovereignty comes into account. There are good stories of getting patents being correctly enforced in China but all too many horror stories. Jurisdiction makes a difference. This also applies to the US. I've a C-suite exec from a large national stock exchange sit across the table from me and declare they don't give a sh@t about our patents as they'll take us down to Texas for their own happy ending. Some of that is bluster but some of it is truth.

In Australia, I've been on the winning and losing argument on patents. The instances turned little on patents but more about the relationships of the parties and barristers to the judge. The winning for me was simply a barrier too far for a mildly-corrupt legal system and judge. Again, almost zero technical merits on one axis yet yielding to technical merit all too strong on another dimension. It's a fuzzy, insecure, personality-driven minefield where strong technical merit does make a difference however it may not.

The strength of the ideas, the drafting, the level of detail, relationships to prior art all matter. Patents not only need to be drafted for negotiation with the patent examiners, but they also have to be drafted with a view to enforceability and defensibility in mind. 

I've joked about the weakness and silliness of IEX's patents in the past: "IEX patents" but they serve a purpose in adding value to the misguided eye of the beholder and add to the confused landscape in trench warfare litigation where they may add some value or simply just add to the "we have N you have M" conversation.

As I mentioned in my tweet reply above, I see three classes of patent:
  1. strategic
  2. tactical, and
  3. defensive.
The defensive ones may be a little bit "shit" but they give you numbers and points to argue. You certainly don't want to bother with them unless you're in a space where litigation is common or likely, but on the flip side is it also hard to tell what the landscape will look like in ten years. Tactical ones are often ones to avoid with a start-up too. Tactical patents may be useful if there is a way to retard someone else's path. That is, they'd have to step on your toes. This is your attempt to box them in so they have to drive through your IP to escape. This may encourage them to trade some rights with you if they feel they can't ignore you. 

The strategic ones are the ones everyone wants. The clear, good idea that stands on its own for which a competitor can't proceed without clearly using that IP, i.e. outcome is a clear indication of a breach. They are not the most common. 

Sometimes a start-up, especially in the service space, is better off with a trade secret and no-patent as their use gives them an undeniable right if it is clearly documented they have commercially used it before some other entity files a patent. The patent dude or dudette still gets royalties from others but can't deny you use. This is not always well understood.

Patents need to be fastidiously correct. It is difficult and hilly terrain. Even today I can see Exablaze or Cisco patents that are invalid because they simply do not attribute the inventors correctly. For some of those patents, I know who made the contributions as I was in the room. Say for the Exablaze hardware matching engine patent which I am listed as an inventor, it would be challengeable as the patent search after filing but before finalisation showed Scott Parsons covered that main territory in a patent attributed to Exegy but the choice was made to patent the work of Exegy anyway.

It is important to think about patents in a broader context. As in the "patent broker's perspective" above, IP has to fit into a more logical strategic, tactical, and execution framework for a business. This includes when to decide to avoid patents. The rules are complex around this and also, like in finance or tax, the rules sometimes don't matter, "US microstructure - why the rules don't matter." That is a slightly facetious way of pointing out there is a long collective history of case histories and interpretations, sometimes in paradoxical conflict, which makes up the historical body of knowledge, rules, and regulation. Without being immersed and familiar with this constantly non-constant sea you are inviting trouble. It is tortuous and dangerous without an experienced guide. This is why we have professionals.

You need an IP or patent attorney that has some years under their belt and has had clients involved in litigation. From first-hand experience, I can say it's hard to find good people in this space. I've run companies and used one of the big IP firms just to have variations of poor drafting, missed deadlines, ass-covering, and advice worthy of a second opinion. In my experience, it simply comes down to finding the right people. They can be at large firms or sole practitioners but you need a well experienced smart person who can delve into the tech synopses, has a strategic mind, is good with detail, and somewhat obsessive about dotting the i's and crossing the t's. In the patent space, they are a rare breed, unfortunately.

It's hard to get good help. Dr Justin Blows at Phoenix IP is my go-to guy in Australia for patent or strategic IP work. He is a clever guy with an optics kind of PhD and deep general technical knowledge. Dr Blows is a little obsessive about filings and deadlines and his system support for such. This is the perfect kind of state you want in your attorney. Attention to detail matters. His strategic thinking about intangibles and the why and when to patent I've probably found the most important. I've learnt a lot in this space and can now confidently say it is not something I can confidently address. Perhaps the most important lesson. 

Justin has deep experience and knowledge about all things IP not just in patents but also in how to think about business intangibles and strategy. Though I do keep telling him he is in the wrong country as Australia is a mildly corrupt country with a small venture base and too much unstrategic thinking in the start-up space. Just as most Australian start-ups would be better off relocating to the US west coast or some such, he would also do better elsewhere I suspect, but he seems to like it here.
Contemporary voodoo doll (source)

I have come to the conclusion that any sufficiently advanced subject is indistinguishable from voodoo. I know this all too well as a C++ programmer that has to read my own code I wrote only a year ago. Same with doctors wearing white coats in the hospital. It is hard to find a good expert or even identify one. Hang onto the good professionals you find as they are worth their weight in something not subject to the vagaries of quantitative easing.

Anyway, my advice to you regarding patents is not to take my advice. Find a professional that has experienced the flames of the patent circus and knows strategies for intangibles. Find the right witch doctors for your voodoo needs.



PS: A little update. Still fighting the drama down under. Middle daughter Ali is turning her troubles into strength with Sane Australia which makes me proud. The old-man here in Tas remains ill with a zillion pulmonary embolisms and we continue to fail and try further to get a proper diagnosis for his immunological problems. We've sold his farm and are moving him to temporary AirBnB for a couple of months before he moves permanently to the more covid prone Queensland where his medically oriented daughters can probably take better care of him than I can. A trying eighteen months or two years that never seems to end, but at least only one death in the family so far and hopefully it stays that way for a while...

Wednesday, 29 January 2020

Out of touch

I spent most of December in critical care with a family member. Medicine is more voodoo than markets. Death, misdiagnosis, errors in surgery (aka cut nerves), months of incorrect treatment. It's a silly world. The last eighteen months could have been better. It continues for now.

Today was a day procedure, so I drove up the mountain behind Hobart whilst the patient was under a general. A bit hazy but a pleasant place to look over the burning, infected planet.

Fuzzy Hobart today, Jan 28th 2020 [A2 phone]

I saw Mr Kipp Rogers chimed in on the "HFT Arms Race" FCA paper by Matteo Aquilina, Eric Budish and Peter O’Neill with his note, 'A Quick Note About the FCA Occasional Paper on “Latency Arbitrage”'. It's a kind note from Mr Rogers. The Aquilina paper has some interesting features. I do find it joyful that the academic world continues to fumble the ball when considering markets. At least there should be a place for me if I can get back to trading this year even without suitable a PhD. It doesn't matter how many footnotes or referees, no one seems to get it quite right. This is true both of the papers I disagree and I agree with. We all tend not to call out the papers we like the sound of though.

Five hundred microseconds is an eternity in such a world and you need to think about what you really are seeing if you're seeing features at that scale. Consider taking the expensive direct market data feeds in Chicago and NJ, say for ES and the ye olde mutant eight-legged ETF. Ask yourself how does the synchronisation between those two markets seem to happen faster than the speed of light? The multi-faceted answer to that question makes you realise that such papers are deeply flawed on more than one axis, particularly in their labelling of features with names bearing little relationship to the implications of the measure. Such mislabeling, or bias, projects heat rather than light into what may be an otherwise fruitful discussion regarding interesting indicators or measurements.

You could say the same for yesterday's WSJ report by Mr Alexander Osipovich, "Ultrafast Trading Costs Stock Investors Nearly $5 Billion a Year, Study Says." Mr Osipovisch reports the paper fairly. However, again, this underlying paper is a misdirection that attributes supernatural powers to market data that is a little improper. The measurements should lead to useful discussion but to call it as "costs stock investors nearly $5 Billion a Year" is unhelpful. More light and less heat would be nice.

Bashing HFT has long been a worthwhile click unfortunately since the gross fiction of "Flash Boys." Articles get clicks. People like me write notes on it. The cycle continues. Not very productive.

Asia Pacific HFTs' business is easing a little but it continues to be good. Large private companies in Australia are publicly reported on so we get to see how the bigger HFT firms are doing here, though lagging by some 18 months or so. The most recent, though old, figures for the 2017/18 year of "total income" were released in December:

Susquehanna Ireland Limited   $166M
Susquehanna Pacific Pty Ltd $324M
IMC Pacific Holding Pty Limited $265M
Optiver Australia Holdings Pty Limited $424M

The previous reporting I noted here FWIW.

People object to profits. This drives some of such anti-HFT news cycle sentiment. HFTs are winning so they must be evil. HFT's can't have systematic losing days by definition as then they'd be out of business. HFTs continue to bear the bare cross of making less money than the market participants they creatively destroy. In the same ATO report, Deutsche scored $1,380M of "total income", CS has $820M, and UBS shows $1,390M. You should worry more about those behemoths. Cheer the little plucky HFTs as the HFTs will take income from the large institutions and make less so you can make more. That's how it is meant to work.

As IEX fades I see it is trying to put forward a D-limit order. This is the kind of improper market structure people feared public markets would lurch towards when IEX originally applied for its license. This should be a Sisyphean moment, but I fear it is not. Short memory it seems.

Midnight Oil with an old favourite from 1983

And whilst US markets continue to deny the need for variable and sub-penny ticks you get the virus of PFOF continuing to both benefit retail and deny best-execution. You'd hope the easy and obvious decisions would be made but then you look at American politics and realise you have to play the hand you're dealt.

Apologies for continuing to be MIA. I hope to get back on track in March or April if the voodoo levy breaks.

Happy trading,


Monday, 1 April 2019

IEX - March 2019 update

The InvestorS-exChange (IEX) remains dark and expensive.
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Market share stayed in the 2.6% range for the month. You remain at risk of violating best execution if you trade there as a broker.

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Tuesday, 19 March 2019

Financial Transaction Taxes - the ghost in the machine

Not many believe in the existence of an FTT. It's the ghost FTT question. Does it exist or not? Should it?

The existing Financial Transaction Tax on publicly traded US equities raised a little under two billion US dollars last year.

Many market professionals know this. Most of the public does not.

To put that in context, Virtu, one of the bigger HFTs, had adjusted normalised net income for the December 2018 quarter of $127M. The existing FTT is already taking in more tax than one of the biggest HFTs made in income last year.

And yet, it is seen to be politically popular to demonise the Wall Street caravan by suggesting ludicrous taxation schemes at unrealisable levels. Far from building a wall around Wall Street to protect the public, such taxes will simply make the US inefficient and push transactions offshore.

One bill introduced to Congress by Rep Peter DeFazio and Sen Brian Schatz puts forward,
0.1% Wall Street Tax Will Curb Dangerous High Frequency Trading And Bring In More Than $777 Billion In New Revenue Over 10 Years
Today, U.S. Representative Peter DeFazio (D-OR), U.S. Senator Brian Schatz (D-HI), and U.S. Senator Chris Van Hollen (D-MD) will introduce legislation to create a new progressive tax on financial transactions that would generate billions in revenue, while addressing economic inequality and reducing high risk and volatility in the market.

“High-frequency traders front-run the market and drive up prices for individuals, pension funds and other value investors,” said Rep. Peter DeFazio (OR-04) “Some days high-frequency traders trade billions of shares that they sometimes hold for only seconds or less. They reap enormous financial benefits for themselves and their privileged elite investors but add no value to our economy."
The imbecilic naivety of DeFazio's comment beggars belief. Front running is illegal. In general, the private trading firms that make up most of the market making HFT don't have customers. Market making HFTs tend to stabilise prices due to earning the spread with mean reverting tendencies. DeFazio wouldn't know a negatively autocorrelated tick tendency if it tasted his toosh.

$777 billion is a slightly silly suggestion. As you can see from Virtu's bottom line the idea that a lazy, unproductive $77.7 billion a year is lying around is supercilious.

This is caravan-like demonising at its crudest.

Sweden's 1984 transaction tax is the oft-quoted poster child example in this space. The tax pushed trading off to London. Tax revenue forecasts were not met as the transactions moved. It was a disaster for the country but things normalised when the tax was finally removed. From Wikipedia,
"During the first week of the tax, the volume of bond trading fell by 85%, even though the tax rate on five-year bonds was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared."
"By 1990, more than 50% of all Swedish trading had moved to London."
Sweden received minimal revenue from fixed-income securities and the gain in equity transactions was offset by losses from capital gains taxation,
"As a result, revenues from these taxes were disappointing. For example, revenues from the tax on fixed-income securities were initially expected to amount to 1,500 million Swedish kronor per year. They did not amount to more than 80 million Swedish kronor in any year and the average was closer to 50 million.[3] In addition, as taxable trading volumes fell, so did revenues from capital gains taxes, entirely offsetting revenues from the equity transactions tax that had grown to 4,000 million Swedish kronor by 1988."
Rep. DeFazio may be correct in the reduction of inequality thesis. Perhaps not in the way he would like though. Such an onerous tax is likely to shift income to other countries from the US. The hegemony of the US in finance may finally be challenged. This may indeed be seen as a generous and globally charitable step for the US Congress to take in reducing inequity by putting America last. Smart? No. Generous? Yes. Perhaps this could help London under hard Brexit conditions. Personally, I'm not sure the planet needs more cigar chuffing bowler hat clad pin-striped suits, nor cliched stereotypes.

A 2010 policy overview by the Institute of Development Studies, "Is a Financial Transaction Tax a Good Idea? A Review of the Evidence", acknowledges that an FTT may increase rather than reduce volatility, as I suggested above,
"...the reductions in market trading and liquidity could result in an increase, rather than a decrease, in volatility"
Though IDS still, foolishly IMHO, suggests a Tobin Tax on Sterling is a good idea. Bah, Humbug.

Why an FTT is a good idea

Should this spectre exist? All of this meandering may lead you to think I'm against an FTT. I'm not. I'm against stupid FTTs.

An FTT may impede efficiency, breed complexity, and push transactions into unintended places, or worse, unintended consequences.

I like the idea of user pays for many aspects of life and governance. If an FTT raises funds to regulate an industry that may not be so bad, right? That is exactly what the somewhat misguided existing FTT on US public equity transactions does right now.

Let's meander over the SEC's FTT.

The SEC is mostly funded by an FTT, or Section 31 Transaction Fees if you want to be formal:
"The SEC does not impose or set any of the fees that investors must pay to their brokers. Instead, under Section 31 of the Securities Exchange Act of 1934, self-regulatory organizations (SROs) -- such as the Financial Industry Regulatory Authority (FINRA) and all of the national securities exchanges -- must pay transaction fees to the SEC based on the volume of securities that are sold on their markets. These fees are designed to recover the costs incurred by the government, including the SEC, for supervising and regulating the securities markets and securities professionals."

The SEC is required to "balance" its FTT to only garnish funds commensurate with its budget. On 22nd May 2018 the SEC's rate dropped to $13.00 per million dollars due to the market's increased turnover. In April 2019 the fee is going up to $20.70 per million dollars. The way it works is the SEC is appropriated a budget by Congress and is expected to raise a similar amount in revenue for the US Treasury. Generally, the SEC raises a lot more than its budget when the fines, ex-restitution, and fees are all taken into account. Don't assume this means it is efficient though ;-)

Here are some extracts from the SEC's "Agency Financial Report, Fiscal Year 2018":

As described further below, the SEC’s finances have several main components:

• An annual appropriation from Congress;
• Securities transaction fees, charged in accordance with Section 31 of the Securities Exchange Act, which offset the agency’s annual appropriation;
• Securities registration, tender offer, and merger fees (also called filing fees), of which $50 million is deposited into the Securities and Exchange Commission Reserve Fund (Reserve Fund) each year. The Reserve Fund may provide resources up to $100 million to pay for SEC expenses, and are not subject to annual appropriation or apportionment;
• Disgorgement and penalties ordered and collected from violators of the securities laws, some of which are then returned to harmed investors and thebalances are transferred to the Treasury; and
• The SEC Investor Protection Fund, which is funded through disgorgement and penalties not distributed to harmed investors, and which is used to make payments to whistleblowers who give tips to aid the SEC’s enforcement efforts in certain circumstances, as well as to cover the expenses of the SEC Office of Inspector General’s (OIG) Employee Suggestion Program.

The report mentions the Section 31 fee decrease:
Section 31 fee revenue increased primarily due to a substantially higher dollar amount of covered sales during FY 2018. As a result of this increased transaction volume, the Section 31 fee rate was reduced from $23.10 to $13.00 per million transacted, effective May 22, 2018.
This is the table of SEC earned revenues:
(click to enlarge)

with Total Budgetary Resources for 2018 being around $2.3 billion:
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SEC program costs were $1.8 billion for their year:
"Total Program Costs were $1.8 billion for the year ended September 30, 2018, a decrease of $197 million, or 10 percent, comparedto FY 2017."
The fees are collected by the SEC for Treasury, rather than being owed to the SEC, and this is offset the budget appropriation. That is, "as the collections come in, the appropriated authority is returned to the U.S. Treasury General Fund." A summary of the budget authority versus the Section 31 fees is as follows:
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In summary, it is a user pays system in a kind of round-a-bout way. I would argue that it is a bad, antiquated way, but at least it seems somewhat appropriate. When you include the fines the SEC sends to US Treasury, the SEC tends to improve the US Government's coffers quite a bit. SEC regulation raises money for the taxpayer. There is no Wall Street nor LaSalle Street burden on the taxpayer.

It could be a worse situation. States could introduce their own FTT which may reduce their population base and other income by driving out those seemingly unwanted higher income jobs. I'm looking at you Illinois, "Illinois lawmakers make case for financial transactions tax,"
Illinois state Rep. Mary Flowers, D-Chicago, has been the standard bearer for a state-based financial transactions tax for a number of years. She brought Matt Harrington, a self-described financial expert, to explain how the financial transactions tax “could help bring prosperity to our economy.”
Yeah, that'd work just dandy, ya dopes,
"Representatives of the finance industry have warned that such a tax would cause entire markets to leave the state, which they said would be as simple as moving data to servers elsewhere because most trading is done digitally."

It'd be funny if it wasn't real life.

Economic ignorance is not a modern disease. We are yet to find a way to vaccinate our legislators.

A good FTT

In conclusion, I would say I'm not opposed to an FTT to assist in regulating an industry. It's already worked OK for many decades. Not many people even notice.

Size matters. I'm opposed to introducing inefficiencies into a market place. You'll only disadvantage your economy if you try something crazy like the DeFazio/Schatz 0.1% outsized fee ridiculousness. Congress needs a moron tax as a priority it seems.

If I was dictator for a day, after I'd merged the CFTC and SEC, I would proceed to ensure a broad-based FTT funded the balance of the not-so-super agency's appropriations after other fee collections.

It's not just the size of it. It's the way you use it. I'm opposed to private equity transactions, such as Uber share transactions, skipping the fee collection process. Are you? To my simple mind, the fee burden should be commensurate with the regulatory burden. For example, it feels wrong the growing private company sector of the economy doesn't pay its fair share for transactional oversight. The last thing the economy needs is another excuse to prevent Jane Public from having access to equitable equity investments. Congress should worry more about that inequity.

Similarly, other transactions, bilateral or multi-lateral OTCs, such as bonds, fx, swaps, CDOs, CLOs, et cetera could have the light touch of an FTT commensurate with their regulatory burden. Such an FTT would be fairly negligible, virtually zero, given their largely private contractual status. Still, it would be better to look at this as a multilateral exercise, say G20, to navigate the furtive flightiness of such capital ideas. You have to be careful what you wish for.

Even with a zero FTT, the tax flows eventually if you keep the jobs and industry. That ain't so bad.

That is, as a zero FTT results in eventual taxation, you should double down on the carefulness of your thoughts regarding the propensity for an FTT's economic inefficiency to induce both capital and labour flight. A nett reduction in taxation and jobs is not the badge a legislator should aspire to wear for an additional FTT burden. The Swedes have already sacrificed for our edification.

A small and properly targeted tax would have limited impact. Indeed a properly targeted FTT may even have the nett effect of reducing Section 31 fees. A reduction in fees on public market equity transactions with regulations' cost burden fairly shared seems an equitable equity to me.

Happy trading,



PS: SEC Section 31 fees are rising again in April 2019:
"Consequently, each SRO will continue to pay the Commission a rate of $13.00 per million for covered sales occurring on charge dates through April 15, 2019, and a rate of $20.70 per million for covered sales occurring on charge dates on or after April 16, 2019. The fee rate for fiscal year 2019 compares similarly to the fee rates in years prior to 2018. As noted in the last advisory, the lower rate in 2018 was in part the result of a substantially higher dollar amount of covered sales."
Fee Rate Advisory #2 for Fiscal Year 2019

Saturday, 9 March 2019

Speedbumpiness: the yin and yang

Speedbumps are good and bad. It's a yin and yang equation.

Here is a short list of my personal evaluation of some bumps or proposed bumps:

ICE - gold and silver futures - bad
IEX - terrible
TSX Alpha - bad
Eurex limited options - bad
FX last looks - very bad
FX arseymmetric bumps - bad
NYSE American - bad but funny

William Poundstone opens Fortune's Formula with an enjoyable example of a speed-bump:

THE STORY STARTS with a corrupt telegraph operator. His name was John Payne, and he worked for Western Union’s Cincinnati office in the early 1900s. At the urging of one of its largest stockholders, Western Union took a moral stand against the evils of gambling. It adopted a policy of refusing to transmit messages reporting horse race results. Payne quit his job and started his own Payne Telegraph Service of Cincinnati. The new service’s sole purpose was to report racetrack results to bookies.  
Payne stationed an employee at the local racetrack. The instant a horse crossed the finish line, the employee used a hand mirror to flash the winner, in code, to another employee in a nearby tall building. This employee telegraphed the results to pool halls all over Cincinnati, on leased wires. 
In our age of omnipresent live sports coverage, the value of Payne’s service may not be apparent. Without the telegraphed results, it could take minutes for news of winning horses to reach bookies. All sorts of shifty practices exploited this delay. A customer who learned the winner before the bookmakers did could place bets on a horse that had already won. 
Payne’s service ensured that the bookies had the advantage. When a customer tried to place a bet on a horse that had already won, the bookie would know it and refuse the bet. When a bettor unknowingly tried to place a bet on a horse that had already lost…naturally, the bookie accepted that bet. 
It is the American dream to invent a useful new product or service that makes a fortune. Within a few years, the Payne wire service was reporting results for tracks from Saratoga to the Midwest. Local crackdowns on gambling only boosted business.
The speedbump delay to the bookies allowed them to not disadvantaged by someone having better information. They used a last-look to only take profitable bets.

The scale of it shouldn't be underestimated, Fortune's Formula continues describing the land before RICO,
The growth of General News Bureau paralleled that of the American Telephone and Telegraph Company. In 1894 Alexander Graham Bell’s telephone patents expired. Within a few years, over 6,000 local telephone companies were competing for the U.S. market. AT&T acquired or drove most of them out of business. Though AT&T’s techniques were more gentlemanly than Annenberg’s, the result was about the same. The government stepped in with an antitrust suit. The legal action was settled in 1913 with an agreement that AT&T permit competing phone companies to connect to its long-distance network. In 1915 the first coast-to-coast telephone line went into operation. The following year, AT&T was added to the Dow Jones average. With its now-legal monopoly and reliable dividend, AT&T was reputed to be a favorite stock of widows and orphans. 
Few of those widows and orphans realized how closely the phone company’s business was connected to bookmaking. General News Bureau did not own the wires connecting every racetrack and bookie joint. It leased lines and equipment from AT&T, much as today’s Internet services lease cables and routers. Both telegraph and voice lines were used. As the system grew more sophisticated, voice lines provided live track commentary.AT&T’s attorneys worried about this side of the business. An in-house legal opinion from 1924 read: “These applicants [the racing wire services] must know that a majority of their customers are bound to be owners of poolrooms and bookmakers. They cannot willfully blind themselves to these facts and, in fact, set up their ignorance of what everybody knows in order to cooperate with lawbreakers.” 
On legal advice, AT&T put an escape clause in its contract with the wire lessees. The clause gave the phone company the right to cancel service should authorities judge the lessee’s business illegal. AT&T continued to do business with bookies—while officially it could claim to be shocked that gambling was going on in its network. By the mid-1930s, Moe Annenberg was AT&T’s fifth largest customer.
The Sting had a nice dramatisation of a dramatisation of such a shop,

So, in my leading "leading" examples, I proposed all of those existing speedbumps mentioned are bad. Yet I suggest there is a yin and yang to them. Where is the yang? Let's meander on.

Good speedbumps

Speedbumps are rational. They may offer a benefit: one type of fairness. Think of an extreme speedbump, such as waiting a day and getting a fair price by formula. Daily VWAP trading is an example of this. VWAP may no longer be the best benchmark to consider, but, in its day, this kind of approach was considered a fair way to play Mr Market's random walk. It is a kind of speedbump that captures much of the essence of fairness.

Back in the old daze of Jefferies, their high touch business noted many of their clients bought stocks other clients sold. There was an opportunity to match these clients and give them a benchmark price. Barra was contracted to write the complex and sophisticated code of comparing two lists of stock to buy and sell. That was a mistake. Barra earnt a silly amount of fees until finally being bought out more than a decade later.

That business for Jefferies did very well, especially as the fees came down. The idea of a lower price for electronically matched orders did not sit well with Jefferies high touch business, so three employees rolled out and started ITG with POSIT in tow. ITG was quite the innovator until they went off the rails, or perhaps stayed on them would be a better analogy.

This kind of dark trading is parasitic, like an index fund, as it relies on price discovery outside the tent but it can be considered fair enough with the benefit of not impacting prices with sizeable blocks.

It's a balance.

Such dark mechanisms have several drawbacks. There is a perverse incentive to maximise information toward the deadline for placing a buy or sell. If you want to buy at tomorrow's clearing price, you may think differently in the afternoon after a huge rally as compared to how you evaluated the scenario in the morning. There has been a war in gaming and anti-gaming techniques with a particular focus on this deadline issue.

Consider if everybody went this route. There would be no reference price to price off. This doesn't work obviously. It seems of a silly theoretic worry until you consider thinly traded assets. That is the nature of a parasite, it may be good to a host until the host is overwhelmed.

Another major drawback is the delay in setting the price. We don't live in an isolated bubble. There is a utility to speed. Faster trades not only allow better information transmission, but they also allow improved risk management due to the lessening of uncertainty and extra trade opportunities. Faster trades also allow more frequent replenishment of liquidity being priced at best.

Consider an auction every second versus one that is hourly. The auction every second is going to be the better resource for pricing and risk. There is more opportunity to hedge, spread, arb, and replenish. The shorter time frame will be the price leader. Do you think an option would be priced off the second hand or the hour hand?

That's a difference of 3,600 to one. It seems kind of obvious but then we lose objectivity when we enter into the mind of the machine with the ascent of the algorithm. A microsecond to a millisecond is over anthropomorphised into eye-blinks and the like. The lack of human scale causes our rationality to wander.

A ten-microsecond exchange can do twenty transactions in the time it takes a two hundred microsecond exchange to do one. Which one do you think may provide better price discovery, risk management and replenishment opportunities?

CODA and Budish et al push elements of slowness akin to a speedbump for continual batch auctions. If they are fair there may be a utility to such speed-bumped thoughts. Prof Eric Budish from Chicago Booth pushes his hobby horse idea of rapid batch auctions as a way of circumventing the need for speed. There is merit to the argument but it similarly suffers from parasitic tendencies, inefficiency, and some gameability via a deadline focus.

I feel such dark activity has some merit and place in modern markets. It was kind of an upstairs thing that migrated to the ATS dark pool. Arguably it should be excluded from public markets and remain in the land of the ATS. My simple view is prices should be visible, tradeable, and striving for efficiency. That is, I am suggesting parasitic markets and their darkness should be excluded from privileged public pools. Hidden orders, icebergs, pegs, and their kin confuse this model with integrated darkness and seem unsuitable for efficient public price discovery.

Good speedbumps are possible but they should have a limited role in public markets.


Foreign exchange is far from simple. There is circling randomness and all sorts of going-ons to confuse the punter in various pools. However, there is also a pretty clear and worrying narrative.

Many banks and institutions had fx pools that they ran for their benefit. The so-called single name pools. They didn't like being picked off in their pools by faster players. Their main way of curbing you in the old days was to give you very limited credit so you couldn't really trade and make any sizeable bank.

The pools both got better at tech and were also threatened by the slow realisation their behaviour was anti-competitive and challengeable. So the credit squeeze eased. One way to give themselves an edge was to add a delay so the bank could decide if they would accept your trade or bin it. This was last-look. They held your order for a while and if it was a loser for the bank, they'd frown and disown it.

That doesn't seem the worst thing in the world when your alternative may be paying a 5% spread at retail, but it violates the principle of visible quotes being tradeable. Unfortunately, it is worse than it seems. Many house traders ran their books more aggressively. With the beneficial hindsight of last-look, there was a tendency to avoid even fair orders and to only accept orders that ran in favour of the house and against the client. The strive for profit maximisation led to the occasional thread of perverse client exploitation.

Remember the other features though, even if last-look was fair it still introduces some inefficiency by limiting the ability to hedge, replenish, and otherwise manage your risk efficiently. This matters more to some than others but no one likes being taken advantage of.

Last-look has a deserved bad name.


I've covered IEX to death. I despise their speed-bump as it is not symmetric, fair, nor simple. It is just a dumb construct, not all of which was IEX's intention but largely so. You can read about it here in Speed-bump 101. The most troubling thing is how IEX misrepresent their flawed system and poor execution outcomes. The SEC has to take some heat for this as it allows IEX to exist as a public exchange with less than 30% of their handled trading being lit. Bad SEC. Bad regulator. Bad. Bad. Bad.

However, IEX had a different intention at the outset that wasn't so bad.

What IEX isn't(click to enlarge)

It was kind of meant to look something like the above picture. It doesn't as it leaks information and has an uneven and unfair lack of colocation, but let's ignore that for now.

A closer approximation of IEX
(click to enlarge)

The intention from IEX was that the speed-bump would be symmetric and allow them to set a fair price, e.g. a reasonable, for some definition of reasonable, midpoint price, for buyers and sellers to match. A kind of dark order. The speed-bump delay allows them to consume all the incoming market data information and look into the future, albeit a short lookahead, and devise an algorithm to decide on the matching price.

There are a few problems I find with this. Firstly, all US NMS public exchanges have dark orders and I don't like it. I like IEX less as it is darker. It is mainly dark. This parasitic behaviour detracts from the price discovery process that should be the role of such privileged markets.

Secondly, the delayed lit quotes you see in the market data feed are like a hall of mirrors. They might not really be there by the time your order winds the long and windy cable, literally long and windy from the spool of wound fibre. Them there fake quotes are disturbing the force. Quotes should be actionable.

The other thing IEX prevents is fair innovation. Its lame dark order types and bogus logistic regression based crumbling quote indicator prevent brokers or other participants rolling their own algorithms. I have written about how IEX's innovation kills innovation. Prevention of innovation is something you'd hope a regulator would raise an eyebrow to. The speed-bump protects IEX as it is the only one that can see into the future in its internal world.

IEX gets worse the closer you look at it. It has separate issues as a speed-bumped lit exchange beyond being a slow and inefficient exchange with high fees, such as auto fading, but meanderers know that already. Let's meander on.

The asymmetric speed-bump: the last-look-a-like demon

TSX Alpha is quite a big turkey. It offers an asymmetric speed-bump. I think of it as arse-emmetric. It smells that bad.

It is kind of a last look where a delay, randomised to 1-3 milliseconds, exists on the aggressive order allowing the price posting order, the resting or passive order, time to get out of the way.

This is not quite last-look but it has some similar features. On such an asymmetric speed-bump a resting order can get out of the way if its master thinks the market is now adverse. It's not the same as last-look as you don't actually know if an order could be headed your way, but it is similar in that you may just decide to always fade if the market is not in your favour near the end of your bump time. That's quite an abuse.

You get the same house of mirrors effect as a symmetric bump where visible quote may not be tradeable. The asymmetry has the benefit where the posting price process, market making, is derisked so participants may quote larger and tighter as they can duck and weave without committing. It looks better but it is not. It's smoke and mirrors.

It's not as simple as that as losing queue priority is still a thing, but you get the idea: fake prices are bad.

Regulators have been hoodwinked into allowing asymmetric speed bumps.

One consolation for such asymmetry is that it isn't as dumb as the Aquis Exchange's post only if you are a prop biz model. That is an amusing but dangerous piece of stupidity. The Aquis model is seemingly "F$%^*&# it!", let's just make it unfair by segmentation. There is a curious reliance on external players in such a place. At least the SEC realised the danger of that model in the US and is unlikely to countenance such a beast.

Is this so new?

Not so new, but a hundred years ago buckets shops were subtler than relying on "The Sting" last looks. They had other ways and means.

In Reminiscences of a Stock Operator by Edwin LeFevre (1923) it was noted that such last look games didn't really need to be played by the unscrupulous bucket shops as there were plenty of other ways to skin a cat,
"Bucket shops in those days seldom lay down on their customers. They didn't have to. There were other ways of parting customers from their money, even when they guessed right. The business was tremendously profitable. When it was conducted legitimately I mean straight, as far as the bucket shop went the fluctuations took care of the shoestring"
The modern equivalent would be the highly levered account at a spread betting or CFD shop.

Nevertheless, our protagonist found his own problems when his visible tape and true market were out of synchronisation by delay,
"The ticker beat me by lagging so far behind the market. I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time the tape double-crossed me. The divergence between the printed and the actual prices undid me. It was the sublimation of my previous unsuccess, the selfsame thing that had beaten me before. It seems so obvious now that tape reading is not enough, irrespective of the brokers' execution, that I wonder why I didn't then see both my trouble and the remedy for it."
I had similar problems in the early nineties trying to trade S&P futures from Sydney via a direct voice box to the Chicago floor. Delays are a killer for many a seemingly reasonable strategy.

I suspect a fresher finance community may be arguing about similar features in another hundred years.

Are speed bumps really all bad? What about a 1-microsecond speed bump?

Reiterating: the idea of delayed darkness is not altogether bad. I just don't like the concept of parasitic darkness being encouraged in public exchanges. Let them go hang out at an ATS or broker's shop. Keep public markets, open, fair, and efficient. We should be encouraging open and fair public price discovery.

I used to worry more about overly complex order types rather than the pegs, hiddens, and icebergs. That was until IEX came along with its perverse, leaky, innovation killing, speed-bump with high fees and misleading snake oil salesmen. To think it all came to widespread attention thanks to the conflicted Lewis helping out his old Netscape "The New New Thing" buddies with their investments in Spread Networks and IEX. The true nature of the dark side of this dark fader makes IEX's flawed model a priority concern when considering the health of public markets.

One of the great levellers of the playing field was the widespread adoption of colocation facilities along with the equalisation of cable lengths. This ensured fairness in the exchange data centre. It is also a kind of speed-bump as the cable lengths are typically not de minimus. A couple of microsecond asymmetric speed-bump may be seen as a fair technology field as typical variation in 10GbE hardware stacks is 0-2 microseconds. That is a slippery slope though and quite the contextual evaluation as competitiveness with FPGAs is now down to single-digit nanoseconds. It is a bit of an easier argument than hundreds of microseconds. Hundreds of microseconds just make an exchange a poor inefficient clunker.

So, I'm arguing speed bumps may have a place. Really big ones for tomorrow's parasitic match seem fair fare for a dark place. Tiny ones, say a couple of microseconds with today's tech, for stimulating fairness with a minimal contextual impact so that efficiency is barely impacted look somewhat benign and arguable. Keep the ones in between out of the public markets, please.

There are other ways exchanges could approach making venues fair. Inverting IEX's approach by bringing the outside in, instead of keeping it out, via customer provisioning of consolidated external feeds may be a better way to spend an IEX sized investment and even things up. Another interesting way may be making an entire region, or planet, a fair co-lo equivalent with timed protected gateways, perhaps even in a customers premise. Also, distributing news, such as SEC Edgar reports, by co-ordinated in co-lo release would be an admirable and inexpensive fairness measure that would make a few RF networks redundant. The SEC should get on that.

We are far from exhausting the exhausting fairness debate.

Happy trading,


Monday, 4 March 2019

NASA's June 2019 launch for Mars Network using tech from 350 BC

Back in 1969, as a two-year-old, I apparently watched Mr Armstrong take a small step for a sheila or bloke on a dusty rock around 380 Megametres from our pale blue dot.

Communication to the moon and back again was Unified-S-Band, a different USB mnemonic to modern familiarity. The video was frequency modulated and telemetry was phase modulated on the subcarriers:
"The solution was called Unified S-band or USB. It combined tracking, ranging, command, voice and television data into a single antenna. Voice and biomedical data were transmitted on a 1.25 MHz FM subcarrier, telemetry was done on a 1.024 MHz bi-phase modulated subcarrier, and the two spacecraft — the command and lunar modules — would use a pseudo-random ranging code using a common phase-modulated S-band downlink frequency of 2287.5 MHz for the CSM and 2282.5 MHz for the LM. In short, every type of information traveling between the ground and a Moon-bound spacecraft had its place. Except for the television broadcast.
To free up space for a television downlink from the lunar module, NASA removed the ranging code and changed the modulation from phase to frequency. This freed up 700 kHz of bandwidth for a television downlink on the USB signal. The problem was that this wasn't enough bandwidth for the standard video camera of the day that transmitted 525 scan lines of data at 30 frames per second at 5 MHz. Instead, NASA would need a slow-scan camera optimized for a smaller format, 320 scan lines of data at 10 frames per second that could be transmitted at just 500 kHz." [Popular Science, "How NASA Broadcast Neil Armstrong Live from the Moon", 6 February, 2016]

Here are a couple of overview diagrams from NASA's Apollo Unified S-Band Technical Conference report:

(click to enlarge)

(click to enlarge)
Despite relying on an Australian dish in a sheep paddock, the signalling worked well. The world watched.

I find it interesting NASA is going back to the future. They're using tech based on a 2,450-year-old modulation for their Mars Network being launched in June 2019. ArsTechnica's Jacek Krywko has scribed an enjoyable article, "Deep space dial-up: How NASA speeds up its interplanetary communications" describing NASA switching to Pulse Position Modulation with free space optics, aka Lasers, for the new Mars link.
"A signal sent from Mars is quite energy-starved by the time it reaches Earth, which is why for the deep space optical link demonstration the LCRD will use another terminal working with the more energy-efficient Pulse Position Modulation technology."
The Greeks were first with pulse position modulation as far as I can tell. Here is a technical document from a 350 BC Greek documentation bundle describing the Hydraulic Telegraph:

Pulse Position Modulation - circa 350 BC
(source: Wikipedia - Hydraulic Telegraph)
I suspect good stone documentation lasts a lot longer than magnetic dust. The survivors of World War III may need to rely on such documentation for technical advancement too.

A modern HFT firm uses the same principles espoused by the historian Polybius (ca. 200-118 BC) in "The Histories" concerning the motivation for their Hydraulic Telegraph,
"It is evident to all that in every matter, and especially in warfare, the power of acting at the right time contributes very much to the success of enterprises..."
[Sourced from Michael Lahanas' archived web]
That is, latency is king.

The Hydraulic Telegraph was an interesting system,
Hydraulic Telegraph recreation - (click to enlarge)
"Aeneas of Stymphalus (known also as Aeneas Tacticus (Αινείας ο Τακτικός)), c. 350 BC, Greek military scientist and cryptographer from Arcadia. He invented an optical system for communication similar to a telegraph: the water-clocks.
The water-clocks are an early long-distance-communication-system. Every communicating party had exactly the same jar, with a same-size-hole that was closed and the same amount of water in it. In the jar was a stick with different messages written on. When one party wanted to tell something to the other it made a fire-sign. When the other answered, both of them opened the hole at the same time. And with the help of another fire-sign closed it again at the same time, too. In the end the water covered the stick until the point of the wanted message." 
It was certainly an advance on the optical signalling, or fire torches, they used to cut down the 600km messaging from Troy to Argos to just a few hours circa 1184 BC. Yes, that's right, optical signalling is over three thousand years old.

NASA's Laser Communications Relay Demonstration (LCRD) will use the same ancient Greek modulation technique the Hydraulic Telegraph used to bump up the Deep Space Network (DSN) and the Mar's Link to some hundreds of megabits per second [Ars, Ibid],
"So we postulate deployment of two relay orbiters that should be placed in the circular, equatorial orbit, about 17,300km above the surface of Mars,” Abraham continues. According to the study, such orbiters are estimated to weigh 1,500kg at launch and should have a set of X band, Ka band, and optical terminals powered by 20 to 30kW solar arrays. They should support Delay Tolerant Network Protocol, which is basically a TCP/IP designed to cope with large latencies and the huge delays that are sure to occur in interplanetary networks. Participating orbiters should be able to communicate with astronauts and vehicles on the surface, with ground stations at Earth, and with each other.
"This cross-link capability is very important because it brings down the number of antennas we're going to need to deal with 250Mbps transmissions,” says Abraham.
The Pulse Position Modulation of the hydraulic telegraph was nevertheless made redundant by the more advanced Phyrctoria. Second century BC Greek engineers, Cleoxenes and Democletus, used spatial encoding over an optical channel to represent 24 symbols. Two fire sticks to the left and three to the right and you'll get a message warning post-Hubbard religious types that the Thetan's are about to arrive in their Earth landers. You can see Theta in the second row and third column in the following Pyrseia table:
Wikipedia - Phryctoria
(click to enlarge)
Nearly two and a half thousand years later, we are completing the loop back to Phryctoria's predecessor, Pulse Position Modulation. Everything old is new again.

So, when you think you have problems with your HFT microwave over the English Channel, think about lasers, the DSN, and 250 Mbps to Mars coming to space agency near you. It's all fun.

Happy trading,



Older meanders

May 2017: "Lines, radios, and cables - oh my" mentions the 160km optical link by amateurs in Tasmania. Plus the follow up, "Oh my - more lines, radios, and cables" that includes more information on hollow-core fibre's 0.99c.

Saturday, 2 March 2019

IEX, the alternative fact exchange, celebrates seven years

Perhaps best to skip this meander. Repetitive with de minimus news value. It's just an update with IEX's February stats.

IEX, the dark and expensive exchange that is still not a restaurant, celebrates seven years of misleading the public, making markets less fair, and occasionally engaging in skullduggery to try and get people fired for critical analysis.

Vice Admiral Jerome Adams, the Surgeon General, may need to put out a health warning for IEX trading. February 2019 results show a little under 2.7% of the US market may be open to their IEX broker being sued for failing to fulfil best execution obligations:
(click to enlarge)
IEX's high trading fees mean disingenuous marketing campaigns with your money (IEX - the cable guy) as the exec's upgrade their houses and cars.

The parasitic darkness at IEX grew a little in February as lit trading regressed somewhat. Treat your customers better. Don't succumb to IEX's spin.

Happy trading,


Friday, 22 February 2019

IEX - the cable guy

IEX has a pretty, petty, and embarrassing youtube advert that is kind of funny in a cringeworthy way:

The basis for the ad is to build on their junk whitepaper.  IEX improperly represents technology costs at other exchanges.

Far from being the fairest girl in Mordor, IEX is the evil one plumbing the darkest depths looking to give you an unpleasant burn around an unmentionable ring. Ramble on.

IEX is complaining about business models here.

For example, Aquis, the exchange with a dodgy and inefficient execution model, only charges for the cable. Aquis would argue that is fairer than IEX not charging for a cable. While IEX doesn't charge for their market data, IEX has very expensive trading fees, baked in unfairness, and a poor execution model. At IEX when you pay nothing for your cable, perhaps you're getting what you pay for. At Aquis, you can trade all you like for free if their dubious model suits your poor taste. Who is better there? Aquis is probably a better place to trade than IEX just on the basis that IEX makes lots of money from very little trading with their high fees and the Aquis income line is fairly lightweight. At the end of the day, both exchanges' weak models impair market structure. The cost of impairing economic efficiency should be better understood by regulators.

BATS also used to have a free market data model, but they succumbed to the pressure of profitability by eventually adding fees for that too. ICE/NYSE, CBOE, and Nasdaq certainly charge some big fees for their fast market data. When you spend a few hundred million dollars on a co-location facility in Mahwah, plus a suped-up Ferrari to run your low-latency high-bandwidth network, you end up with slightly more costs to reclaim than IEX crudely and rudely ruminates on.

Most exchanges try to balance the fees between trading and market data. Market data, like petroleum for your car, is pretty inelastic in its demand curve. Price whatever: you have to have it, or you can't get your work done. Reg NMS, as the highway system for trades, is powered by market data. High market data fees act as a tax on efficiency.

Trading fees are more elastic in demand than market data. As you seek out best execution, you don't have to trade everywhere. You just have to avoid trading poorly. IEX's high trading fees represent an unfortunate tax on efficiency. At least, you're not forced to trade on IEX's dodgy two-bit exchange even if you need to consume their dodgy data feed directly or indirectly.

NYSE and Nasdaq have had high rates of growth in market data fees. Many think this is unfair, including SIFMA,
"This pragmatic ruling by the SEC indicates increasing recognition by policymakers that the fee structure for proprietary market data products is broken. As noted in the unanimous decision, ‘the exchanges fail to meet their burden to demonstrate that the fees are fair and reasonable and not unreasonably discriminatory’ as required under current law. Today’s decision should prompt further examination of policy reforms to ensure the efficiency of public market data feeds and fairness of fees"
The SEC recognised this,
"Today, the Commission held that neither NYSE Arca, Inc. (“Arca”) nor Nasdaq Stock Market LLC (“Nasdaq”) had met its burden to show that the fees, filed in 2010 for ArcaBook and Level 2 (together, the “products”) and subsequently challenged by SIFMA, were fair and reasonable under the Securities Exchange Act of 1934."
The SEC paused this silliness. This marketing BS from IEX has at least now risen from toxic misrepresentation by whitepaper, to being kind of funny in a cringeworthy way. Perhaps by lowering the debate, IEX's schmarketing is at least more palatable. Hence the greater danger in misrepresentation here. More people may digest this without the necessary degree of cynicism. This diarrhoea for your grey matter is undeserving of grey water.

I don't think this kind of advertising could stand in Australia. We have pretty tight laws about false and misleading advertising. Many US adverts I see on US television wouldn't pass muster here. I guess IEX will do anything to try and get to a monthly 3%. Ethics begone.

This is not so dissimilar to their false and misleading claims regarding long and short queues at exchanges where IEX improperly dropped CHX's short queues from their charts. It's also a bit similar to how they project mid-point trading to being good when it misses the point that trading at best gains you half a spread over mid-point. Their rebates are called discounts to hide their hypocrisy. IEX say not having a co-lo is fairer when the move to colocation was one of the great improvements in fairness in exchange history. Latency arb potential is worse at IEX than all other US NMS exchanges and yet they'll promote themselves are your latency arb saviour. A very dark exchange.

Don't be a schmuck. Follow the money. IEX makes a fair bit of revenue from very little turnover. If you can't tell who the sucker at the table is, think harder.

So, in summary, beware of IEX's free pipe. It is not the pleasant ale you're looking for. It is directly connected to their sewer.

"These aren't the droids you're looking for." - Simon Baker

Side note: I used to work with Simon, not that he'd probably remember, as is asymmetry.

Happy trading,


Friday, 15 February 2019

General market stupidity - "More than $2B of Inefficiencies Found in U.S. Stock Market"

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,


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!



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.