Wednesday, 13 December 2017

Buffetting due?

It's getting close. Here is the indicator Mr Warren Buffett thinks is, "probably the best single measure of where valuations stand at any given moment." He is not too well known for being consistently wrong:



It's especially interesting when you think about the reduced public company count and increased private equity reliance. Actions, not just words, count. Berkshire has over $100B in lazy cash, so his money seems to be where his mouth is too.

Safe trading,

--Matt.

Tuesday, 12 December 2017

That's not a bubble. That's a bubble...

(With apologies to Crocodile Dundee)

You think Bitcoin is a bubble?

I'll show you a bubble:


(source, alternative source, Shiller)
"Just kids having fun." Bitcoin has a $100-400B market cap, depending on the precise second. Global markets are about to cross the $100,000 Billion threshold. 

Focus.

Happy trading,

--Matt.

PS: Did you notice 1987?

Monday, 11 December 2017

Curious Bitcoin curiosities

Time for a cup of reality?
Say yesterday, you meandered into a diner near Wall and Broad as you plotted your future Bitcoin futures strategy. It was a rare diner that takes bitcoin for food. Your lucky day!

You get your Morning Joe and it costs you $3 buckaroos.

Magic happens. You pay by bitcoin.

Or did you?

Did you wait the average of ten minutes for your transaction to be processed?

I thought not. It wasn't a real bitcoin transaction. It was just a promise. Probably through someone like Coinbase, the big mama of bitcoin broking. There's nothing wrong with that, it is just not really the libertine free-wheeling anarchy that most people think it is. It's just another layered financial service.

If your underlying vendors comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations then you're known, watched, traced, observed. Every bitcoin transaction is completely traceable until the exit points run afoul of illegal anonymity. Tumblers may tumble, but your Merkle tree with its double sha256 is an inviolable truth despite its leading zeros.

That ten minutes you would have to wait is baked into the system design. If miners process your transactions faster they get asked to find more zeros to maintain the 10 minutes. That is how it works.

Do you know how much your $3 coffee cost in fees?

Let's look at that last 24 hours:

Capture from https://blockchain.info/stats
(click to enlarge)
Yep, the cost per transaction was $121.55 in fees yesterday. Your coffee cost $3 plus $121.55 for a total of $124.55. And that excludes the processing fee which may have been absorbed by the retailer. Makes retail fx spreads look like a gender neutral young choir participant , no?

But, but, you didn't really pay that much I hear you say? That's right. That is the clever trick. Whilst the miners earned nearly $40M yesterday for processing just 160 blocks or wee little hashes, 18% was the optional fee embedded into the protocol, and the vast majority of the rich rewards were just new issuances. Free bitcoin for all lucky miners! A dilutive gift from the protocol God. An economics PhD is not required for further analysis - just a couch.

Look at the awesome power of the bitcoin processing:

Bitcoin Hashrate on a log scale from https://blockchain.info/charts/hash-rate?timespan=all&scale=1
(click to enlarge)
That's right 12.653 billion GigaHashes per second. Colour me impressed! That is, a bunch of hardware throwing random bits at a hashing function to combine with the tree that is called a chain so that 160 blocks can complete during that day. Pesky little hard to find runs of zeros. It is about 2500 binary operations to do an SHA256 double hash to see if you have enough zeros on the left of the slot machine to be a winner. That makes a supercomputer with roughly 31.6 x 10^21 binary operations a second or about 17.1 x 10^24 ops per block. Phew. That's 17.1 yotta ops or ~17,100,000 exaops, or 17100000000000000000000000 ops: to process a block.

Puts the power bill into perspective, no?

(don't click to enlarge this one)
Feel the POWER ... bill!


Email thought about doing proof-of-work before bitcoin came along. It was a thought bubble about preventing spam. Perhaps if you make sending email cost a tiny amount then spammers sending millions of emails may think twice? Hmmm. Fortunately, we are not so burdened with our email.

Well, at least it is secure?

There are some shady and simply unknown characters in the mining industry. It is best to keep your head down rather than invite regulation if you can, so let's emphasise unknown.

In bitcoin land, the majority and the longest chain, or tree branch, or direct acyclic graph, or whatever the thingy with the hash in the Merkle tree wants to be called today, is the law. The most popular and biggest wins. As long as there are lots of people it is hard to overrule the majority opinion. So how many people would it take to subvert the transaction truth?

Four:

Mining pool share for the last 24 hours
(source: https://blockchain.info/pools) 

(click to enlarge)
Four is enough for a majority. I'm sure they're fine upstanding citizens. All with a AAA rating from the Moodster and Poor Standards no doubt. In the past, there were times when only one dudette controlled the mining flow - or 50% of the power. Bitcoin survived that despite the violation of safety. It shouldn't have to trust the humanity of one as that was never the point.

It is a bit hard to work out a discounted cash flow model on all of this. Especially as we don't know how it ends, or rather we know it does end. No more coins will be issued. There will be no incentive to mine. There is a finite horizon, the bitcoin event horizon, that is its own y2k, 2038, problem to solve with a twist that there is no tomorrow.

Not to worry, your bitcoin will likely be stolen before then. IBM and others are hoping quantum supremacy will be next year. Maybe not. It is not decades away though. Whilst your hashes will be safe, your wallets will be open for all to pilfer thanks to the quantumtastically hackable public key encryption that protects your transactions. Even the ASX's so-called perfect forward secrecy will be broken by the very same Digital Asset monster.

At least everyone has their own copy of the database?  Well, it grew to over 100GB in 2016. Feels efficient that everyone should have a copy, no? No wonder the financial system keeps growing from 2% of the economy a bit over a hundred years ago to the 6-10% of GDP it represents in most modern estates. Fintech be damned. We keep finding inefficient ways to shoot ourselves in the foot.

So, now your cup of coffee is making someone else rich with a C note of fees; the transaction could be foxed in its recording; its processing faith rests with four people from a self appointed few agreeing not to collude; you're polluting the world and killing people via the pollution from your excess electrickery consumption; and you're supporting a criminally inefficient transaction system with bloated databases replicated everywhere that is favoured by child pornographers, mobsters, cyber hackers, and terrorists. You and your bloody morning coffee!

*Shrug*

In cryptography we trust. In Bitcoin we place our faith. Pass on the ICO. Amen.

Happy "efficient" trading,

--Matt.

PS: Worth reading, Is your exchange for real? Kipp Rogers on Bitcoin exchanges, "Some questions for Crypto-Exchanges"

Monday, 4 December 2017

Is IEX a Giffen Good?

I'll kill the suspense to this rhetoric: no, IEX is not such a good. It is more of an evil.

IEX behaves a little like a Giffen Good though. The price is more expensive than other offerings but the demand continues to rise. It remains dark and expensive, like a restaurant, with around 81% of the order flow to IEX not being displayed in November.


IEX Lit / total handled %


November 19.0%
October 18.2%
September 20.0%
August 20.6%
July 20.3%
June 20.0%
May 17.5%
April 18.7%
March 19.8%
Not much is actually displayed and traded at this so-called public exchange

It's a pretty poor outcome for a public exchange. I'd hope the SEC finds it an embarrassment. Public exchanges should promote price discovery. IEX's Dark Fader subverts price discovery.

Whilst IEX's market share remains small, it continues to rise modestly, despite the luxury pricing, in true Giffen Good style:

IEX market share
(Source data: IEX)
IEX's growth still shows that higher volume days have less displayed transactions. The darkness grows. Jedis required.



In some ways, it is unsurprising as the execution quality is crap less than ideal for displayed orders.

The marketing remains the strength of IEX. It promotes fairy tales such as queues being short being great for your trading. IEX neglects to mention that queues are even shorter at CHX. Schmarketing.

IEX trumpets its execution quality via the stats on BATS but fails to mention that its largely dark execution is not comparable via such a methodology. Scratch the surface and the execution quality of IEX is not just bad, it is shockingly bad.

In a galaxy far far away, Kipp Rogers pointed out IEX's customer and trade concentration allowed some strong possibilities of trade identification, "Pershing Square and Information Leakage on IEX." But it gets worse. It turns out that traders at BATS, NYSE, and Nasdaq co-lo facilities are likely to know about IEX trades before IEX's own customers. This is by design. The SIPS are faster at disseminating quotes than IEX's infamous magic shoebox delay. IEX continues to promote the idea that they protect customers from latency arbitrage when they are actually the exchange that allows the highest level of latency arbitrage possibility. Schmarketing...

In the mostly fictional FlashBoys, Michael Lewis promoted the two Netscape Jim's, Barksdale and Clark, investment in IEX as well as the Barksdale family business Spread Networks. Forbes reported that the Jim Barksdale, a key figurine in Lewis' book, "The New New Thing" invested $225 million in Spread with outside financing suggested to be $75 million,
"Spread won't disclose cost, but Jason Cohen, the chief operating officer of Allied Fiber, which is building a nationwide network, says laying cable through easy terrain runs $200,000 per mile. Half of Spread's route, however, is through tough virgin terrain, pushing forbes' estimate of its cost toward $300 million. Jim Barksdale put up all of the capital other than $75 million financed by outside investors." (Source: Forbes Sep 2010 "Wall Street's Speed War")
Last week, Zayo picked up Spread Networks for $127 million. This may not a discount to the investment as Spread had some rather lucrative and long contracts signed by firms who were not always aware that microwave was faster. Also, it has not been disclosed if the purchase included any liabilities. Still, Spread doesn't sound like the best performing investment, despite the Lewis marketing machine.

IEX's expensive trading fees may provide a good deal of comfort to IEX investors. Imagine paying ten times the price for worse execution quality. If you can pitch that successfully to customers and provide them with a story that they won't be latency arb'd by others and yet make the latency arb worse, you just might go down with the Wolf on Wall Street as the ultimate pen marketer. Schmarketing.

Then imagine the slightly ridiculous message that having short queues, i.e. no one to trade with, is good for your trading because you won't be at the back of the queue. It's hard to imagine this fictional world in which other exchanges don't exist.

Mr David Weisberger points this out on his blog, "IEX ignores DATA (again) to market their exchange,"
"Notice that IEX is dead last in executed percentage, with a fill rate of 1.8%, more than 75% below NYSE and 65% lower than NASDAQ.  Readers should note that this is the best data available[1] as it counts only shares accepted by the markets which are priced at the NBBO when the order was received."
Mr Weisberger also points out that IEX has the largest effective spread by one apples-to-apples measure in "The Not-So-Amazing IEX “Flea Circus” Continues",

ExchangeEffective/Quoted SpreadExecuted Shares Reported
New York Stock Exchange945,998,168,176
Arca93.63,569,541,813
Nasdaq933,494,330,238
Bats94.32,726,036,147
IEX98.3497,251,536
"This data, provided by BestXStats, is based on all marketable orders in NYSE listed stocks sent to the exchanges and reported pursuant to Rule 605 in July. It only includes orders without trading restrictions that are from 100 to 9,999 shares. This is the most relevant metric for determining execution quality, as it is the only “apples to apples” comparison between the exchanges. Considering that IEX is materially inferior to the other primary exchanges in execution quality in NYSE listed stocks..."
Mr Weisberger does a pretty good job on showing why you really shouldn't route to IEX if you take your best execution obligations seriously and wish to survive an SEC audit in "IEX Marketing Sinks to a New Low",
"Additionally, IEX only has displayed liquidity 10% of the time when the inverted venues don’t have displayed quantity.  This implies that their displayed liquidity is not competitive with the listing exchanges, which additional analysis confirms.  To underscore this point, according to data provided by MayStreet and analyzed by ViableMkts, IEX had a total NBBO participation metric of 0.48% for the month of June in NYSE Listed Securities.  This compares to 30.76% for the NYSE, 8.92% for Nasdaq, 8.39% for ARCA, and a combined 10.95% for the combination of EDGX and Bats.  For Nasdaq listed equities, IEX has a NBBO participation metric of 0.77% compared to 33.91% for Nasdaq, 9.52% for ARCA, 11.69% for EdgX and 5.13% for Bats.   (as described earlier this week, this metric is derived for each exchange by multiplying the percentage of time spent at the NBBO for each exchange by each exchange’s displayed volume when at the NBBO, and dividing that by the aggregate average displayed volume at the NBBO."
Schmarketing.

Ah, that feels better. It's been a while since I've had a whinge about IEX. I guess my inner engineer just doesn't like schmarketing.

Happy trading,

--Matt.
_________________

Older IEX meanderings

Sunday, 13 August 2017

IEX fee regression

Public exchanges are meant to promote efficient price discovery and risk management. IEX thwarts such efficiencies.

IEX's new fee scheme further damages both price discovery and risk management. Let's meander through this.

The Fall of Icarus, 17th century, Musée Antoine Vivenel
Here is the filing IEX lodged for the fee change:  SR-IEX-2017-27,
"a proposed rule change to increase the fees assessed under specified circumstances for execution of orders that take liquidity during periods when the IEX System has determined that a “crumbling quote” exists" [p3]
That is, IEX is hiking the fees for taking prices, erroneously called taking liquidity, to the maximum fee allowed by the SEC, $0.0030 per share, when their crumbling quote indicator (CQI) goes off 350 microseconds into the future for a period of 2.35 milliseconds into the future, from your external point of view.

Previously IEX used rebates, a subsidised price of zero in this case, for displayed price taking orders that complied with particular volume constraints. Well kind of, if you hit a displayed price, yes free, but maybe for maybe not if hitting non-displayed prices.  Specifically, taking non-displayed prices costs $0.0009 unless,
"Taking Non-Displayed Liquidity with a Displayable Order and at least 90% of TMVD was identified by IEX as Providing Displayed Liquidity (i.e., the Member’s execution reports reflect that the sum of executions with Fee Code L and a Last Liquidity Indicator (FIX tag 851) of '1' (Added Liquidity), divided by the sum of executions with Fee Code L, is at least 90% for the calendar month​)"  [IEX web]
At least that is the old text. IEX has also filed a rule change for this to be specific to a particular MPID: SR-IEX-2017-25,
"Taking Non-Displayed Liquidity with a Displayable Order and at least 90% of TMVD, on a per MPID basis, was identified by IEX as Providing Displayed Liquidity (i.e., the Member’s execution reports reflect that the sum of executions with Fee Code L and a Last Liquidity Indicator (FIX tag 851) of '1' (Added Liquidity), divided by the sum of executions with Fee Code L, is at least 90% for the calendar month)" [p20]
The definition of "TMVD" was also changed to include an MPID reference,
""TMVD" means total monthly volume displayable calculated as the sum of executions from each of the Member's MPID’s (on a per MPID basis) displayable orders during the calendar month." [p19]
The MPID change is to be effective from September 1st, 2017.

Interestingly in this SR-IEX-2017-25, IEX admits it has been charging members incorrectly as it had been using an MPID based formula all along instead of the published and approved member method. Did IEX report the billing violation to the SEC as a separate event? Should the SEC step in and fine IEX for incorrect billing?
"IEX reviewed Member invoices since its launch as an exchange in August 2016 through June 30, 2017 to assess whether any Members were charged fees that differed from those described in the Fee Schedule. In other words, IEX recalculated the Non-Displayed Match Fee and the 90% threshold exception on a “per Member” basis (which is how the Fee Schedule currently reads) instead of on a “per MPID” basis (which is how IEX in practice had been calculating that fee). This assessment identified that nine Members were charged such differential fees in particular months, in some cases more than the fees described in the Fee Schedule and in some cases less than the fees described in the Fee Schedule. In total, seven Members were charged and paid $18,948.54 in excess fees and eight Members were not charged $44,175.28 in fees that should have been charged. Five Members were overcharged and undercharged in different months." [p14]
To add insult to injury, IEX is going after those people it has been incorrectly undercharging for the last twelve months. Bumper bills in September,
"IEX will charge..each impacted member for the net amount..underpaid and will be included in the August 2017 monthly invoices to be sent in September 2017" [p14]
I'm not sure how I'd define great customer service, but this would not be it.

Let's meander back to the main issue of charging the maximum fee possible for CQI conditions. It is not quite as simple as just charging the maximum fee under those conditions. IEX applies some threshold relief. The wording is a little poorly written for a formal document, but the idea is that the big fee applies if you do at least one million shares a month then it applies to the number of taken prices above more the number represented by 5% of the total executions, on an MPID basis.
"At the end of each calendar month, executions with Fee Code Q that exceed the CQRF Threshold are subject to the Crumbling Quote Remove Fee. Otherwise, to the extent a Member receives multiple Fee Codes on an execution, the lower fee shall apply."
" “CQRF Threshold” means the Crumbling Quote Remove Fee Threshold. The threshold is equal to 5% of the sum of a Member’s total monthly executions on IEX if at least 1,000,000 shares during the calendar month, measured on an MPID basis."
"Executions with Fee Code Q that exceed the CQRF Threshold are subject to the Crumbling Quote Remove Fee."
Apart from trying to make NYSE American's task harder, IEX's goal is to prevent adverse selection against price providers.

IEX reports,
"Across all approximately 8,000 symbols available for trading on IEX, the CQI is on only 1.24 seconds per symbol per day on average (0.005% of the time during regular market hours), but 30.4% of marketable orders are received during those time periods, which indicates that certain types of trading strategies are seeking to aggressively target liquidity providers during periods of quote instability. " [p26]
That is, IEX is looking to dramatically increase fees on 30.4% of marketable orders. If you read the bold statement in bold above you might find yourself nodding. IEX overstates this. Remember the CQI applies for 2,000,000 nanoseconds after it is triggered. When the CQI is a true positive, this means that if you want to trade on IEX when the price changes, then you pay a premium.

That is, IEX applies the highest price it legally can to discourage trading around the time the price changes. That is a harsh penalty that impacts the efficiency of both price discovery and risk management. I guess it is just the important times; those times prices change. Why would a trader want to trade at important times? Such an attitude goes against the explicit goals the SEC has memorialized many times with regard to the purpose of the National Market System. Then again, if you're a Franken-pool that prefers dark trading, why not permeate further your destructive to public market interest microstructure.

Another important feature of such a beast is that you can't always really decide in advance if your order will be subject to the CQI as IEX has the benefit of last-look, or looking into the future, within the exchange. You may only know after the event that a CQI applies, but not as you place the trade. Trading with an unknown fee may be less than optimal for some institutions. Best execution obligations are certainly harder. Perhaps it is best not to trade at IEX if you may be inadvertently violating best-ex.

Another amusing aside to the silliness of it all comes from the poor implementation of the CQI. When IEX changed to their new IEX Signal implementation of the CQI, they reported,
"On our example day of December 15, 2016, ... This new candidate formula would have produced about 2 million true positives and 2.1 million false positives." [The Evolution of the Crumbling Quote Signal, Allison Bishop, p28]
IEX has a pretty dumb one-size-fits-all CQI implementation that has more false positives than true positives - according to IEX. False positive domination means the CQI is normally fake news. That is, the majority of the time IEX charges you the SEC's legally maximum possible fee, their invalid rationale is invalid. You couldn't make this up if it wasn't true.

There are also two humorous outcomes relating to IEX's routing implementation. IEX's routed orders may be subject to an excessive CQI fee for a marketable order, particularly large institutional orders. Even funnier, it may perhaps be a best execution requirement that if there are shares available for an order elsewhere, the IEX router should not route to IEX as this will save clients' money due to avoiding the high IEX price taking fees. If IEX does not comply, then you'd hope the SEC will take action against IEX's violation of best-ex obligations. It would be funny to see IEX fined for routing orders to itself. That'd definitely be worth a chuckle.

IEX leaks information by design. It is more subject to latency arbitrage due to its SIP leakage and lack of fair co-lo. It not only prevents trading at price change time with its dark fading orders but now wants to discourage price discovery and risk management with high fees for when trading is needed most - at times of change. What happened to simple and few order types with simple and transparent pricing?

The IEX cult is becoming a lot more like the Flat Earth Society. I wonder if the mainstream media will ever call out IEX's misleading hypocrisy for the hubristic bullshit it truly is?

Happy trading,

--Matt.

_________

PS: IEX, instead of being greedy by taking the fee for yourself, you could generously provide some of it to the price provider. Would that be a compensatory rebate or a kickback?