Thursday, 16 June 2016

IEX - the good, the bad, and the ugly

About a day ago, the story broke on WSJ that SEC staff were supportive of IEX's exchange application being approved. It seems to be normal that the SEC Commissioners follow staff recommendations. However, the Commissioners exist as they are deemed to have a purpose. Perhaps they don't approve but the odds are now pretty good for approval.

IEX's infamous "Magic Shoebox"
(click to enlarge)
I've written previously that I think IEX should be allowed to be an exchange if it dropped the unfair routing but with an exception that denied IEX protected quote status. However, I also commented that I believed such an exception would probably be illegal. Rules are rules, right?

Also, I had earlier criticised IEX due to its lack of transparency around its DPEG order which I was pleased to see documented better subsequently in and after their exchange application.

Now, IEX has dropped its contentious undelayed routing. 

The SEC then invited conversations around if a 350 microsecond, or even one millisecond, delay should be de minimus. Is it fair? This was a sensible conversation to have as exchanges already address co-lo and intersite fairness with both adjusted cables, or with latency leveling (as per BATS dual DC production set-up). Such small delays are not really comparable to IEX's as there are 100x or 1000x the difference in the delays being discussed. A worthwhile conversation nevertheless.

Other exchanges have threatened to go to court if IEX gets approved. This too seems reasonable as otherwise they could have previously used delayed structures in their exchanges. I'm not sure the exchanges would win though as the omniscience of the SEC is worth something, but normally there would be at least a temporary rule proposal, or pilot, and a corresponding comment period.

IIROC to the north have a policy on speed-bumped data that such data is not-protected but it should be considered, if it happens to be available, for customer best execution. A sensible compromise the SEC may also consider if it can climb off the prescriptive wagon and board the policy train.

It's been an interesting, painfully interesting, debate that follows closely that ancient Chinese curse, "May you live in interesting times." It has also been much ado about nothing as my simple mind believes the IEX technical and economic model to be quite broken. I suspect the terrific marketing will eventually fade, and to the mean, economic performance will revert.

We'll find out what the Commissioners think soon enough. 

Let's meander through the good, the bad, and the ugly.

The Good


The main asset IEX has going for it is the post "Flash Boys" hype Michael Lewis managed to create for Brad Katsuyama and his team at IEX. I may be wrong but, I truly believe Brad thinks he is doing a good thing with his magic shoebox. He thinks IEX is helping improving market structure and trading outcomes for investors. I think that is largely baloney but Brad does not seem to be pulling a swifty here, he thinks he is doing good.

Much of the outcry of angst thrown at IEX is due to the book "Flash Boys."  It really was a crap work of fiction and any reasonably knowledgeable market participant knew it was crap. The Spread Networks and wireless theme was a false narrative. The castigation of SEC officials around the concept of Thor was stupid and mean in view of their reasoned view. Lewis having friends Clark and Barksdale from his prior book, "The New New Thing," as investors in Spread Networks and IEX was undisclosed suggesting explicit or implicit bias. Much of the book was just fiction and to many market professionals, like me, it was the equivalent of the of dragging fingernails across a chalkboard (shiver), or proving that 1 + 1 = 3. 

Brad wasn't really discovering something new with Thor. A better interpretation was that he was wasting his broking clients money trading improperly before he worked it out. It is well known many other brokers were already doing the right thing. Essentially, Brad was being paid $2M a year by RBC to be a bad broker. However, the good is that Brad means well. It is clear he wishes to do the right thing by his clients. That is half the battle won.

Another good aspect of IEX, is their DPEG order. It is also both ugly and bad, but it represents a true innovation. DPEG is a complex and dark order type that has both limit and mid-point functionality with a last-look feature that takes advantage of undelayed external market data to look into the future and protect a passive investor from price instantly moving against them. Now, last-look doesn't really need undelayed versus delayed data for implementation, but that is moot here. At the same time it disadvantages an investor seeking liquidity. Somewhat ironically, this complex order is perhaps more likely to be understood and used by an HFT than a traditional investor. Citadel self reported that they are the biggest IEX trader on some days. Virtu was an early and continuing larger trader and supporter. Lewis would not like that. 

IEX reported that DPEG usage was around 11% of volume in December 2014 and, as this was early in its life, I expect the use has probably grown. DPEG is parasitic as it relies on their being an efficient market already existing outside of IEX, so it can never be a proper public market mechanism for price discovery, but it is a useful innovation.

To a large extent, the negativity caused by Lewis is not Brad's or IEX's fault. Brad left his $2M a year job to "go save the world", or the NMS, with his speed bump and IEX. So far, the market has liked his solution. Here is a current market share chart for IEX, being FINRA's ATS statistics on Tier 1 stocks as released this week. IEX has done well.

IEX ATS share (orange line, 2nd largest)
(click to enlarge)

The Bad - speed bump


IEX's speed bump is a bad solution. Brad's speed-bump does not protect anyone. It creates market risk and is just a stupid piece of market microstructure. All it does is make a slow exchange. It is a complete misunderstanding of the principle he thought he understood when he stumbled across a feature, most already knew, in his Thor algo. Brad says with a speed-bump you don't need co-location. That is crap. Even though IEX sees co-location as an evil, has said it will not offer it, it kind of requires it. 

Firstly, speed-bump or no speed-bump, the race to displayed orders, and some non-displayed orders, on IEX is a latency race and what counts is you triggering first. Fastest mostly wins, even on IEX. To hit first you need to be as close as possible to the POP. The POP is in a Equinix data centre, NY5, at 800 Secaucus Road, Secaucus, NJ. If you wish to compete for a trade you need to be a nanosecond, or picosecond, faster than your competition. To do that, the obvious way is to co-locate, which means getting space in NY5. So much for no co-location. Strike one.

Co-location is actually one of the great levellers in financial markets. No longer do you have to find where the matching engine is and then secrete a location and comms link as close as possible. Co-location makes trading fair, to suggest otherwise is just naive of Brad. He needs to think that one through a little more.

Now, close your eyes. How are you still reading? Oh well, think of an exchange that takes an hour to process a transaction. Think of that slow exchange competing against an exchange that executes in a microsecond. Imagine an external stimulus, such as a non-farm payrolls announcement of one million jobs created for the month. Follow the trades. The price action is going to be pronounced on the microsecond exchange and who knows what the hell is happening to your orders on the hour delayed exchange. Fast exchanges allowing hedging, liquidity replenishment, efficient price discovery, and are an obviously better solution. 

In the real world, some exchanges operate under 100 microseconds in round trip times (RTTs), some lower than 40 micros. IEX, due to the speed bump, is at least 700 micros, with 350 micros of delay in, plus processing, and then 350 micros of delay out. On a 40 microsecond exchange you may be able to do twenty transactions to minimise your risk, hedge, replenish liquidity, whatever, whilst you live in the land of the unknown at IEX with risk resplendent. Slow exchanges are dumb. IEX is slow.

There is a good chance speed-bumps may proliferate when IEX is approved. Speed-bumps are dumb but clients think they benefit from them, thanks to Lewis and IEX. Exchanges will find ways to give clients what they want. What a mess...

The Bad - complex orders


There was a twitter mention of IEX having simple orders and pricing. I've suggested earlier that DPEG is complex, so hearing about the simplicity of IEX grates a little, so I challenged for someone to come us with a simple explanation for DPEG. See below:
That is not a bad attempt, but not only does it over-simplify, that is if you understand the terminology, it is wrong. One of the clever things you might do with a DPEG is set a limit inside the mid-point so you can use the last-look feature to maintain a passive price near the NBBO that doesn't get adversely selected. Sal forgot about that bit. DPEG is a great order type for an HFT. 

Part of the problem with all of this is the original promise IEX made: it would keeps the orders simple. In Flash Boys, Lewis talks about how the "Puzzle Masters" reviewed some 150 different order types at various exchanges and they were aghast at complexity of it all. Here is an extract (click to enlarge):

Flash Boys quote (click to enlarge)
OK. Pages of specifications? Nuances in understanding? Let's have a detailed look at IEX's patent pending DPEG:

An overview of a Pegged Order from the IEX rules:


(Click to enlarge)

That is straight forward enough. Non-displayed (aka dark), mid-point, etc. Let's look at the DPEG specifics.
(click to enlarge)
OK. Getting a bit more complex. Priority, the less aggressive of..., hold it, what is this "except during periods of quote instability." Let's have a look at that:


(click to enlarge)
Hmmm, it doesn't say it here, but DPEG uses undelayed data, that is non-speed bumped data, to look at the current outside market and the market a second ago, that is the equivalent of looking 650 microseconds back into the past and 350 microseconds into the future then using this formula:


Nice formula.

Not complex at all, right? Though remember it is really 350 microseconds into the future, and 650 microseconds into the past, not one millisecond, due to the undelayed market data feed usage.

There are some further considerations regarding your order as a non-displayed order too:
 Now IEX supports an anti-internalisation group identifier:

There are some more details on the practice of Price Sliding, but instead of dumping the rules here, I've just pulled out an explanatory bit for you:


There's more, but let's stop now. Do you agree, DPEG is not a simple order type? This goes against the very premise of IEX given in the "Puzzle Masters" section of Flash Boys.

Order type complexity is one of the few real concerns appropriately raised in Flash Boys. A valid point in a sea of trash. Order type proliferation is a real problem, as Haim Bodek will tell you quite correctly.  With scores of order types at dozens of venues how the hell is a investor meant to understand how to best trade? Now, you can see how IEX has fallen into the trap of order complexity just as many other exchanges also have. It is a slippery slope. Order types are nearly always invented to meet a perceived or real need. There is a real potential benefit to the market maker with a DPEG that makes it a useful order type even if it does come at the cost of other types of investors, such as institutions trying to take liquidity, like Brad tried at RBC.

The Bad - Price complexity


IEX said it would stick to simple pricing. No maker / taker. Brad and Lewis went over how maker / taker pricing was bad in the book. It was deemed a lecherous evil that should be banished. IEX would have simple pricing of 9 mils for all sides. The anti-rebate argument is crap, as I've written about previously, "Trading rebates - a choice, not an evil.

That makes IEX one of the most expensive ways to transact in NMS with an 18 mil round trip. If IEX could pull that off, it would also make IEX one of the richest exchanges by gouging their customers on all those round trips. Some maker / maker exchanges only make a mill or two from the passive / aggressive offset. I don't know of any that pilfer 18 mils. Other exchanges will rebate 25 and charge 26 for a nett of 1, or some such. That is, IEX is around an order of magnitude more expensive to trade at than, say, BATS.

Well, single point pricing didn't last long at IEX anyway. They currently have a zero price holiday for displayed orders that has been extended till the end of July, but not quite all displayed orders. Let's look at how you can work it out. Originally, you had to be an approved subscriber before April 1, 2015, now it applies to all subscribers. 

This seems simple enough, 
"Trades of shares displayed on the IEX Book are charged a fee of 0 mils/share for both the adder and remover of those displayed shares during the promotional pricing period."
However, what if you go to take best, but you hit a non-displayed order? Well, you get price improvement, but now you may have to pay a fee because, 
"Effective June 1, 2015 (previously announced in Trading Alert #2015-011) and during the promotional pricing period, on a monthly basis, Subscribers who execute displayable interest against non-displayed orders, which would have incurred the standard fee, are eligible for the pricing promotion on such executions; provided that at least 90% of their aggregate executions of displayable orders added liquidity during such month."
So 0 if a displayed order, except if I hit a non-displayed order, unless 90% of my aggregate executions have added liquidity for the month then it is 0, otherwise it's 9, unless I hit an internalised order as all of those are free but not on the exchange as internalised orders have been dropped as part of the exchange transition, unless my order gets routed away and then I pay ....

It's all good, as the exchange will tell you, 
"Trade Liquidity Indicator" (FIX tag 9730) can be used by Subscribers to determine if an execution at IEX involved displayed or non-displayed liquidity. This tag is generally used in conjunction with "LastMkt" (FIX tag 30) to help calculate trading fees. 
Effective April 1, 2015, Trade Liquidity Indicator (FIX tag 9730) was expanded to support the following values when an order is executed at IEX: 
S = a self-matched trade which did not involve displayed liquidity
SL = a self-matched trade which did involve displayed liquidity 
I = a trade on IEX which neither self-matched nor involved displayed liquidity 
L = a trade on IEX which did involve displayed liquidity but did not self-match 
IEX conventions for routable orders will remain unchanged. If a routable order is submitted to IEX and ultimately executed at an external destination, IEX will pass back the Trade Liquidity Indicator (FIX tag 9730) defined by the executing venue to the Subscriber.
For reference, the Last Liquidity Indicator (FIX tag 851) can be used to determine whether the trade in question added (value 1) or removed (values 2 or 9) liquidity on IEX.
Easy enough, except for the bit about keeping track of your 90% of aggregate executions and adding liquidity. 

It's simpler than many exchanges that have volume breaks, makers benefits, etc, but it is not the one size fits all as originally promised, is it? Zero makes sense when you can't eat humble pie and rebate, but it is not quite as planned.

Remember DPEG, and perhaps other Peg, non-displayed orders are a big part of the volume picture, and rationale for IEX. You pay for non-displayed. That is a lot of expensive trading that is taking place.

The Bad - SIP gaming


Someone may know about your order being filled or cancelled before you do. In this way IEX encourages the latency arbitrage of their own investors' orders. Yep, you read that right. 

IEX will report to the SIP undelayed notifications as is required by Reg NMS. At least that is what is in their rule book (pp 206): 
(B) Securities Information Processors. Pursuant to IEX Rule 11.240(c) and IEX Rule 11.240 (d), the System connects to the SIPs to disseminate quotation and last sale (i.e. execution) information. Communications with the SIPs do not traverse the POP.
This may not have mattered too much not that long ago when the SIP was as slow as old dog with a limp during a hot day on a rough outback road, but now the SIP may sometimes be a little faster than the 350 microseconds shoebox delay. This quickly gets ugly, so let's put this one in the ugly basket as it is not so relevant to IEX, the dark pool or ATS.

The Ugly - SIP gaming


Let's have a quick look at where IEX is in NJ:
IEX Pop (click to enlarge)
In the above picture, you can see NY5 is marked in red at 800 Secausus Road which is the IEX Pop. Everything to and from IEX goes through the Pop. To compete effectively you need to co-locate at NY5. NY5 is an Equinix DC. One very small yellow star, very small I know sorry, is south west for NY2 at 275 Hartz Way. Another very small yellow star is south easterly at 755 Secaucus Road and this is NY4. It's a busy little exchange area. BATS split their DC's between NY4 and NY5 in a latency equalised way which is pretty simple as there is only a couple of microseconds, if that, between the DCs by fibre. Remember every 200m in fibre is a microsecond.

The actual matching engine for IEX was located at 1919 Park Avenue, Weehawken:

IEX matching engine (click to enlarge)
The yellow star to the north east of the IEX marker in the map is 300 Boulevard East, NJ2, and the reference point we'll use shortly.

Between NJ2 in Weehawken and NY5 there is about 4.1 km of distance as the fibre crow would fly if it could, but it doesn't. That would equate to about 41 fibre microseconds of round trip time (RTT) if that were possible, which would be a minimum possible optical fibre time. That is a bit less than the 700 microseconds RTT enforced by the magic shoebox, but it is also not clear if that is plus 700 micros in additional to normal overheads or equalised to 700 micros.

Now, fibre is 5 microseconds per km, but the speed of light, or 'c', is 3.33 microseconds per km. That is fibre is 2/3c whilst RF, such as light, microwave, and millimetre wave travels at ~1c, or 50% faster. So it would be about 27.4 micros RTT between IEX's pop and its matching engine by RF.

Now, IEX reports undelayed fills to the SIP. I presume this goes from the Weehawken, but it could be Secaucus. There are two SIPS: one run by NYSE for Tape A and Tape B, the CTS; and, one run by Nasdaq for Tape C, i.e. UTP. The NYSE SIP is at 1700 MacArthur Boulevard, Mahwah in the NYSE liquidity centre and the Nasdaq SIP is down in Carteret in the Verizon DC at 1400 Federal Boulevard with the rest of the Nasdaq operations. Let's have a look at these on a map of NJ.

Mahwah/NYSE, to the North; Carteret/Nasdaq is Southwest. IEX Pop & Match in the middle
(click to enlarge)
Here is a simplified version of the map, care of McKay Brothers:

(click to enlarge)
The potential hole in IEX's model here is that the undelayed reporting to the SIP maybe faster than getting the data directly via the magic shoe box delay at the Pop. Could this be the case?

A few years ago, the answer was definitely NO as the SIP overhead was measured in milliseconds. Let's look at the SIP latencies now:

For UTP, you'll find whilst the average latency has dropped from 2010's 5,420 micros to 920 micros, the 10th percentile latency of 390 microseconds makes it, once you add in travel time, unlikely you'll benefit over a competitor waiting diligently at the IEX Pop in Secaucus.

For the CTA SIP, the average latency overhead has dropped from 11,450 micros in 3Q2010 to 490 micros now which would be discouraging if latency distribution was not helpful, but it is. The Median latency is 220 microseconds, and the 10th percentile latency is 150 microseconds. Depending on the travel times, there may be a way to take advantage of this at IEX. Let meander through this some more.

Travel times


Not many people will give us credible travel times, so lets look at the distances, implied minimum fibre times, implied minimum RF times, and whatever public data for wireless we can find:


Distance – km Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 34.0 34.3 36.8 55.6
NY4 34.0 - .3 4.1 25.9
NY5 34.3 .3 - 4.3 26.1
NJ2 36.8 4.1 4.3 - 27.0
Carteret 55.6 25.9 26.1 27.0 -






Min: RF – uWave/mWave/Laser Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 113.3 114.3 122.5 185.4
NY4 113.3 - .9 13.7 86.3
NY5 114.3 .9 - 14.4 86.8
NJ2 122.5 13.7 14.4 - 89.9
Carteret 185.4 86.3 86.8 89.9 -






Min: Optical Fibre Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 170.0 171.5 183.8 278.2
NY4 170.0 - 1.4 20.5 129.5
NY5 171.5 1.4 - 21.7 130.3
NJ2 183.8 20.5 21.7 - 134.9
Carteret 278.2 129.5 130.3 134.9 -






TMX – radio/radio Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 118.0 - - 192.5
NY4 118.0 - - - 92.0
NY5 - - - - -
NJ2 - - - - -
Carteret 192.5 92.0 - - -






TMX – rack/rack Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 124.5 - - 202.0
NY4 124.5 - - - 100.0
NY5 - - - - -
NJ2 - - - - -
Carteret 202.0 100.0 - - -






Quincy Data Mahwah NY4 NY5 NJ2 Carteret
Mahwah - - - - -
NY4 - - - - 96.0
NY5 - - - - -
NJ2 - - - - -
Carteret - 96.0 - - -






Nasdaq – Apsara Mahwah NY4 NY5 NJ2 Carteret
Mahwah - 117.5 - - 192.0
NY4 117.5 - - - 90.0
NY5 - - - - -
NJ2 - - - - 98.0
Carteret 192.0 90.0 - 98.0 -






Spread Networks Mahwah NY4 NY5 NJ2 Carteret
Mahwah - - - - -
NY4 - - - - 95.0
NY5 - - - - -
NJ2 - - - - -
Carteret - 95.0 - - -

OK. We can see the IEX engine at NJ2 to CTA SIP at Mahwah distance is 36.8 km. This could be one or two hundred metres out depending on roof placements (they are big buildings), etc. This translates to over 183.8 fibre microseconds (one way), or over 122.5 RF microseconds (one way). Even if we had RF both ways from IEX to the SIP we're not going to get an advantage as 114.3 + 122.5 + 150 = 386.3 > the pop's 350. It's close and perhaps at the 1st percentile, or if the SIP advances there could be something in it, eventually, if the SIP was really fast RF internally.

Not all is lost. There is a chance that if we can do a latency arb to NYSE or another service in Mahwah. We could conceivably advantage ourselves over the poor guy waiting for his fill back at IEX. The best case, that is somewhat unlikely:

  • NYSE RF only path = 122.5 + 150 = 272.5
  • IEX path = 350 + 114.3  = 464.3
It shows that using the SIP in Mahwah has the potential to be faster than the investor at IEX using RF to get to Mahwah to potentially trade.

Let's assume a not so rosy scenario, that is, the path to Mahwah is an optical one:
  • NYSE optical path = 183.8 + 150 = 333.8
                                                           < 464.3!
At 334 micros we still have some room to take up some of the likely inefficiency and still be faster than the trader at IEX wanting to do an arbitrage at NYSE via RF.

If we look at real world RF latencies reported, we see about 4 to 15 micros of extra overhead on the links. Though the end-point to end-point specification is only sometimes crystal clear.

Naturally, I suspect the SIP communications will have significantly extra overheads, firewalls, SFTI foo, and perhaps not quite make it, but it might. 

The point here is that this is exactly what IEX is not meant to be about. If this scenario gets realistic, a trader may need to have multiple sites of trading set up at various liquidity centres to ensure that she does not get back-run, latency arb'd, or whatever you want to call it. IEX may make your trading set-up a lot messier and more expensive.

This is ugly, no?

Conclusion


I'm not that fussed about IEX itself as I think its business model, is, ahhh, non-optimal. Apart from some innovation with the complex, dark, DPEG order to suit an HFT seeking to avoid adverse selection, it is a pretty dumb and expensive price discovery and trade solution. Being dumb is not against Reg NMS rules though.

I still think that provided Reg NMS is not undermined, and the SEC does not allow protected status for potentially stale IEX quotes (adopt similar rules to IIROC & exclude tape fees), IEX should be allowed to be an exchange. IEX should be allowed the good grace of capitalistic failure even if that may take a while due to its wrong-headed fanboy marketing momentum. 

However, the utility of Reg NMS is at stake if other exchanges also get greenlit for delays, partial delays, more complex orders, further darkness, etc. It could be a real mess. Apart from the sad escalation in costs, and further barriers to entry, that is terrific news for us HFT types, and market structure analysts, as the IEX approval will create some very tricky market structure to take advantage of. 

Flash boys & IEX?  
  • Low and simple costs = FAIL
  • Simple order types = FAIL
  • Protected from latency arb = FAIL
  • Colocation not required = FAIL
  • Sophisticated infrastructure and microwave not required = FAIL
  • Good intentions nevertheless = hollow SUCCESS
IEX shareholders need to think long and hard about this pup they've been sold. IEX has plenty of cash. It is not too late to pivot and build an exchange with real solutions that would actually help investors.

Jane Doe on Main Street needs a different solution.

--Matt.

16 comments:

  1. Matt - this is really good. Thanks - Larry Tabb

    ReplyDelete
  2. Nasdaq and NYSE could cause IEX's shoebox model trouble by making their SIPs faster. If IEX tape data from a SIP is faster than IEX pop data it would require a response from IEX.

    Then again, whilst that may undermine IEX's current model, it may just push IEX to a stronger model.

    ReplyDelete
    Replies
    1. The fun thing Matt is that at least the UTP SIP is undergoing a pretty substantial upgrade this year, which I think is scheduled to be finished by the end of the year. Should bring the RTT through UQ down to <50µs, if I recall correctly.

      Delete
    2. One response from IEX could be to eliminate, or reduce, their outward delay and perhaps increase their inward delay which prevents the SIPs being first. That would need SEC approval though you'd think.

      It is also a grey area of Reg NMS as you could have a straw argument the pop delays are delaying the publishing to the SIPs, but if they win on the de minimis argument for trading, that may also be reasoned for SIP publishing.

      Delete
  3. Matt- you seem like a nice guy, but you sound like an idiot. The exchanges are all fighting IEX because all the do is make money off data feed fees. IEX is going to crush those fees to something reasonable. The market IS unfair, and prob always will be. IEX is a step in the right direction.

    ReplyDelete
    Replies
    1. You're right on many accounts. I do indeed sound like an idiot. The market is unfair: scores of order types and dozens of venues make it difficult for any person to understand how to approach the beast. However, it is probably fairer than it has even been in human history. Things are pretty good but we could do better; even us idiots. We need more disruption, perhaps IEX will eventually find a way.

      Delete
  4. Thanks for this. I still know (as a trader who knows the markets) that IEX is a disruptor doing the right thing. The exchanges are a joke and so transparent in this fight. They want to maintain high fee/HFT centric structure.

    ReplyDelete
    Replies
    1. I agree IEX is trying to do the right thing, but I do think an outside-in model, rather than an inside-out model, would work better for them.

      By this, I mean they have the funds to pipe the external data by RF to themselves for their customers and have a low latency exchange. Contingent algos from a co-lo could then give all, even retail, fair access from their iPhones. This would make them fair and the best exchange for price discovery. A win for all.

      I feel the speed-bump model is just a bit wrong-headed even if it is well meaning.

      Delete
  5. The real answer here is to force everyone to use a universal SIP. Why this does not happen? The exchanges make their $$- most of it at least- from their Mrkt data. Its a crime, because you have to use this data to trade, and therefore have to pay them. A universal SIP? whats the problem with that? Greed and unfairness.

    ReplyDelete
    Replies
    1. Canaries, physics, innovation are all reasons to avoid a universal SIP. A better SIP, or SIPs, is a good idea but a total solution it is not. We do have market data vendors too. Remember, even a direct feed from an exchange is a look into a rearview mirror of the auction. It is all a probability cloud. Our imperfect world slowly gets better though.

      Delete
  6. I think you miss the point of the market. It does not matter how fast or slow, good or bad the SIP is. If we all are forced to access the market thru the same feed(SIP), then nobody had an advantage there at least. It makes 100% sense. The exchanges should not be in the biz of selling different MD feeds to that different traders wind up with different views if the market. There is NO need to sell direct feeds and also depth of book feeds so that if you pay up, you get a better look at the market. The exchanges should really just be a utility as much as possible. After all, its only a place where buyers try to meet sellers. Dont overthink it. Unless you are a conflicted part of the status quo....

    ReplyDelete
    Replies
    1. I have little faith in monopolies nor uncontrolled competition. A single SIP makes no sense to me, but my children have a long list of all the times I've been wrong...

      Delete
  7. I dont see any opposing argument for making everyone view the market through the same lens. We are simply talking about a SIP feed that distributes everyone the same exact market data. It should be constructed by technical people, but everyone has the same information. If you cant even agree thats a good start, then yes, you are part of the problem. The competition can be weeded out on the other end. Trade fees, technical stability? I dont know- there is not much more an exchange can or should do. Just a gathering place for buyers and sellers. Selling feeds is ridiculous and just not needed. Unless you want the individual investors to figure out if they are trading with the right info. Come on man, dont get pulled in by the dark side!

    ReplyDelete
    Replies
    1. But then you know the flow of transactions from your order channel before the rest of the market and may "trade ahead" of the market based on your flow. Larger traders win.

      I like an alternative design with client inward channels that have no feedback at all. The feedback is all in the market data feed. I think that design has merit and is quite a bit different to the current models. The MD could also be free.

      Delete
  8. Protected Status it is. Thoughts?

    ReplyDelete
    Replies
    1. Protected status is an error. A small error that may grow into a large error.

      The consequences will depend on new responses and enforcement.

      New order types with delays are likely from other exchanges. The SEC explicitly dropped the 1ms de minimis thought and went with a geographic reasoning.

      "..not adopting the proposed guidance .. that delays of less than one millisecond are de minimis" p27 of the de minimis response.

      Firstly, there will be 90 days or till when IEX is live, which ever is later, to comply with protected status. The consequences will be two fold:

      1) less likely the IEX quote will be hittable; and,
      2) additional risk not knowing if you're filled with a longer time frame.

      The first is obvious but the second is a real challenge as you might have done 20 tx's at BATS in the meanwhile, for example.


      IEX
      ---
      ord?

      BATS
      ----
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill
      ord?
      ack/fill

      IEX
      ---
      ack/fill


      Phew, that's a long wait...

      Some existing stats show fills of close to 100% (or over 100% due to dark) for most venues with high sixties for IEX. That is likely to get worse with protected status. IEX will be a low quality market place.

      If it is viewed that you can simply tack on a serial route to the end of spray or serial response then it will not be too bad, apart from the risk resplendent of not knowing. That is, route last.

      A greater problem is the SEC reasoning for the de minimis. In their geographic argument they cited CHX in particular which, as we know, has an ~8ms RTT by RF or ~12ms RTT by fibre. Then, as the N in NMS indicates, a NY to LA RTT of over 40+ms would fit the same argument. So to meet the same standard, delays of over forty milliseconds are rational.

      Exchanges are likely to give clients some solutions they perceive they need, but don't really, and propose speed-bumped scenarios, over many or specific parts of order types. This will truly create the "hall of mirrors" effect, argued by some previously, with order completion times increasing and risk increasing.

      There is immediate pressure for SIPs to improve, and potentially move to Secaucus or Weehawken, to undermine the IEX pop as the IEX to SIP publish is approved as undelayed only.

      Investors may need multiple set-ups to compensate for SIP publishing ahead of the IEX pop otherwise they may be latency arb'd.

      Immediate consequences? Much ado about nothing. A serial route that is less likely to be filled. IEX customers more likely to get arbed or beaten by NY5 co-lo'd new IEX clients. NMS slightly worse. IEX significantly worse fills for existing clients but more volume. Good for IEX. Bad for IEX customers.

      Secondary consequences? More dark trading. New delays in the system. More risk. Increasing complex algo development. Some brokers, investors, and traders at risk of failure.

      Tertiary consequences? Further SEC rule development. Perhaps limitations to the order protection rule. The worsening of NMS likely to lead to improvements to fix NMS but in the scale of years.

      All this new complexity is: very good for HFTs, though painful from an effort and cost pov; good for market structure analysts; and, BAD for the consumer.

      It's kind of ironic that IEX is making things worse for investors and making things better for HFT. Not quite the intended consequence.

      Delete