Wednesday, 4 January 2017

How to game Nasdaq's Extended Life Priority Order Attribute

Someone at Nasdaq wasn't thinking too hard when they proposed the Extended Life Priority Order Attribute (ELO). To quote ELO, "Confusion - you don't know what you're sayin'":


The FIA Principal Traders Group penned a pretty reasonable takedown of the proposal here. In addition to FIA's commentary, you always have to be suspicious of retail justification, or trials, for orders. Almost no retail order ever sees a US public exchange. It is kind of like justifying invasive laws with terrorism. Beware of falsely profiting prophets.

Simply put, the ELO attribute, if you set it, puts you ahead of other orders at the same price. 99% of your orders, reviewed quarterly, with the ELO attribute set need to last at least one second, or be executed. Yes, you can cancel your ELO attributed order in just a few nanoseconds without consequence, just keep in mind the 99% rule.

As an HFT, simply mark every order as ELO. Gain priority on all your orders and profit. Make sure 99% of your orders are away from best so they normally last the required one second. This can be done in the normal course of business as this is how you would paint the book with proper trade intentions for priority anyway. Trade normally with your regular flow, including fast cancels.

If you get it a bit wrong, don't panic as it is reviewed quarterly and you will be not pushed out on your first indiscretion.

Everyone will do the same, so all orders will be ELO and nothing changes. Stupid, huh?

The ELO proposal is trivially easy to game and thus somewhat pointless. Nasdaq should withdraw it.

Live long and prosper,

--Matt.

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PS: ELO is kind of weird when the normal behaviour is for priority to be granted for orders the longer they are in the system anyway. You know, the normal price, time priority ordering thing. ELO grants priority for a promise of being in the system longer, but you don't have to mean it. You can cancel an ELO in a nanosecond regardless of your promise. Your ELOs are still ordered by time priority of arrival compared to other ELOs, so picoseconds still matter. Nevertheless, your one microsecond old ELO will take priority over the order that has been in the system for two hours. That makes little sense.

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