
'Flash Boys' IEX stock exchange opens for business - prostoalex
http://www.latimes.com/business/la-fi-capital-group-iex-20160815-snap-story.html
======
chollida1
If you're wondering what IEX becoming a full blown exchange means to you, well
it probably doesn't matter at all.

They have been operating for some time already as an ATS, today they are now
part of the RegNMS protected quote, meaning that up until today, brokers did
not have to route orders to them.

it also allows them to have companies "list" on their exchange, though I don't
know of any companies that are planning on listing with IEX currently.

They bring 4 unique things to the market

\- their built in delay of 350 micro seconds on each incoming and out going
message, ie they delay order's coming in and they delay fill notifications
going out.

\- they have a patented dynamic peg algo that will allow a user to place an
order that the exchange will dynamically price. This order type was a bit
contentious as the exchange doesn't delay quote changes when updating these
orders, ie these orders are blessed in the sense that they don't obey the 350
microsecond delay.

[https://www.iextrading.com/trading/dpeg/](https://www.iextrading.com/trading/dpeg/)

\- they aren't currently allowing co-location

\- they don't participate in the maker taker model. They charge, I think, 9
cents on dark orders and nothing for lit orders.

Maybe the most interesting thing that IEX has brought to the US market is that
the NYSE is now filing to add their own discretionary PEG order.

[https://www.nyse.com/network/article/nyse-order-
types](https://www.nyse.com/network/article/nyse-order-types)

~~~
tuna-piano
This is the thing when I see wall street, and specifically high frequency
trading vilified. Income inequality, the plight of the middle class, etc has
almost nothing to do with that kind of financial maneuvering. Getting rid of
high speed trading won't affect the average person really at all - but yet
it's constantly vilified.

~~~
modoc
As a mostly lay person, for me it's vilified because my understanding of it is
that HFT has a significant advantage over my own personal trading, and that
through this advantage HFTs are able to make "more" profits than would be
possible without HFT. My brain tells me that some of these profits are likely
at my own trades' expense, and that while markets and economies rise and fall,
my own profits are negatively impacted by HFT.

That may not be accurate, but that's why I personally feel uncomfortable with
HFT.

~~~
tptacek
You don't do the kind of trading HFTs do. No matter whether trading is done
with hand signals or in FPGAs, you were never going to be making markets.

Meanwhile, cost of trading for normal people like us has gone through the
floor. And we're only really looking at the last 15 years when we think about
trading costs, but even steeper reductions precede that, and it was all
brought about by replacing human market makers --- who are crooked as a barrel
of fishhooks --- with automated systems.

Respectfully --- I don't know you, and this isn't a personal comment --- but
my guess is that you distrust HFT because you've been told to distrust it. If
you do even the most superficial _cui bono_ analysis, you'll see the people
most interested in making you believe that are themselves major financial
institutions, all of them far larger than the HFTs.

It wasn't HFTs that brought down the economy in '07-'08\. It was their
adversaries.

~~~
patio11
The only disagreement I have with Thomas here is the last line. Securitization
groups at the large banks and HFTs aren't adversaries -- they don't interact
in any meaningful fashion. Large banks, taken as a whole, have some groups
which are in competition with HFTs but have other groups which are their happy
customers. (If you're a large bank, and you're taking liquidity, you are
either astoundingly bad at your job or you _actually desire to be buying what
HFTs are selling_.)

The industry standard for buying/selling mortgage-backed securities or
collateralized debt obligations isn't HFT. It isn't even automated. It is one
sweating jock yelling at another sweating jock over a recorded telephone call.
You can see this dramatized in The Big Short, where to unwind the shorts that
the "good guys" have made they have to get their own not-quite-sweating not-
quite-jock played-by-Brad-Pitt to do the phone calls on their behalf.

~~~
kchoudhu
> It isn't even automated.

Yes. No. Maybe. There's a massive push towards exchange trading the more
liquid products: traders are expensive, and if you can get a robot to do basic
inventory management and market making for you (even with a human in the
loop), that's savings for a desk manager looking to cut costs in a highly
straightened FI environment.

The highly distressed and/or exotic stuff that people are talking about in the
Big Short are still slung by salespeople, with the connivance/approval of
traders.

------
opaque
Fun trivia from Flash Boys they originally were going to use the full name
Investor's Exchange, but the url was unfortunate:

www.investorsexchange.com

Hence they use the short form IEX.

~~~
_asummers
Ah yes bringing back memories of expertsexchange.com

I'm so happy Stack Overflow won that battle.

------
eggy
I've read both sides of the argument about the IEX delay, and my common sense
tells me you cannot try and put the genie back in the bottle.

If technology exists, has been discovered, you cannot thwart it by trying to
mask it by retarding it.

It think it is ironic that an exchange, IEX, founded with one of its aims
being to level the playing field by calling out HFT as 'wrong' or 'unfair',
and yet allow for their dynamic trades to bypass their 350 us delay is an
example of we don't need it/we do need it.

People cry out about HFT being a game for the super players only, but out of
it comes innovation - faster switches, well-honed programming tricks, hardware
and software that eventually make their way to other uses. Sort of how the
military and porn industry pushed a lot of tech we take for granted today.

~~~
tbihl
In what way could this comment possibly be worthy of a down vote? It's
complete and thought-provoking.

~~~
tedunangst
Called HFT innovative. Can't say that here.

~~~
rrrrsss99
I think it's inaccurate to put hft in the future tech division with darpa or
porn. Maybe it will lead to fpga's/c++/microwaves being widely used for ML,
but it seems unlikely that the low latency and minimal cross country
transmission has has much value. If you're building a system to process lots
of data quickly transmitting a few bytes between the UK and Belgium slightly
faster than a wire won't be a constraint. Maybe it will lead to real time
instance based learning, but I'm not aware of anyone going in that direction

~~~
eggy
Algorithms are also worked on, not just transmission or switching. And speed
is always needed by some field or another, so I would argue it has its fruits
beyond what you may have posited.

------
ddinh
In terms of reducing the ability of speedy traders to gain an advantage in a
continuous time market, how does IEX's fixed time delay compare to
discretizing the timesteps, so all the trades within some finite interval [t,
t+e] are treated as if they came at the same time?

This talk presents compares discretization to standard continuous-time
bidding, but doesn't go into a lot of detail about how it compares to IEX-
style delays: [https://simons.berkeley.edu/talks/eric-
budish-2015-11-19](https://simons.berkeley.edu/talks/eric-budish-2015-11-19)

~~~
chollida1
The IEX delay and batch auctions are really two completely different things.

IEX delays almost all messages in and out by a small amount.

They don't delay messages for orders that their own router modifies, their
discretionary peg order. This lets their peg orders update before any one, ie
HFTs, can update their own resting orders on IEX or at other exchanges in the
case of a fill at IEX.

It's important to note that even with the IEX design, speed is still very
important as its still a price time priority queue for order placement and
cancelling. An analogy would be if all 100 meter sprinters reaction times were
delayed by 1 second from hearing the starters pistol. The fastest runner still
wins, its just that all reactions times are delayed evenly.

Batch auctions are a whole different animal, and to be honest, one I'm not
very familiar with. Their greatest weakness is that they don't operate in a
stand alone environment, ie the rest of the world continues to trade around
them which eliminates most of their advantage.

~~~
sjbase
Do you mind expanding on that last point? I'm interested in your take on
how/why a batch auction's advantage is eliminated by the rest of the world
trading around them.

~~~
kasey_junk
Largely because the entirety of latency arb has to do with taking advantage of
price differences between exchanges. How those differences are created is
largely immaterial.

As long as you have multiple exchanges that are not perfectly syncd (a
distributed systems problem!) There will be time based arbitrage
opportunities.

~~~
rrrrsss99
Not exactly in all products. US equities exchanges have to comply with the
nbbo (national best bid offer), so they're required to forward an order to the
exchange with the best price. This isn't true for futures, but there aren't
any fungible futures in the US. This means that latency arb in US equities
isn't true arbitrage. If you see a price level get sweeped at one exchange,
you may guess that the others will follow, but it's no guarantee and most
sophisticated traders who trade the volume to do this will trade in a dark
pool or block trade, so the opportunities are close to non existent. The
intent for equities market making is to trade retail orders with the
assumption that they they're placed with no knowledge of a true price and
won't move the market. The true arb opportunities today are reserved to minis
vs futures or cross exchange futures vs indexes

~~~
tptacek
I think the point Kasey is hinting at is that the functionality you claim
RegNMS requires exchanges to implement is not, due to the CAP theorem,
actually possible to do reliably.

------
rrrrsss99
An interesting data point in the hft rigged market debate I never see is, what
do the insiders do with their money? I work at an electronic market maker that
trades on colocated servers with fpgas and rents bandwidth on microwaves, so
we without a doubt fall under the hft umbrella. My 401k is 100% invested in
index funds and my personal brokerage account is split between 80% vanguard
index etfs and a few stocks (that I probably shouldn't have invested in, but I
didn't know what I was doing when I got started). This is similar to my
coworkers and people I know at other firms. Why would we do this if we were
knowingly rigging the market against retail investors? To answer my own
question, if you're an investor, the microstructure of the exchanges is
irrelevant. When I put in an order to by 100 shares of VTI, I'll put in a
limit order after the close a half percent above the closing price knowing
that it will be sold to citadel or another internalizer who will fill the
order at a good price (nbbo, debatable since they're being investigated
currently) and take the penny or two spread. I could put in a limit for the
close, but either I wouldn't get filled or if I did, it would only be due to
the market moving against me and honestly the difference doesn't matter. I
have no intent to sell at a particular profit point or watch a screen all day
to find some imagined perfect entry point which I wouldn't even know if I saw
it. I'm interested to hear if opponents of hft have considered this or think
insiders are behaving differently. I won't make the argument that we're
looking out for the little guy or we have some mission to benefit society
through price discovery. We basically print money when the market goes down,
but we're so far removed from the average person that I can only assume that
the hatred is based on marketing and false perception.

------
chrisbennet
For those who haven't read "Flash Boys", this a synopsis of the book:

Canadian banker Brad Katsuyama notices prices for stocks he is buying change
price almost the instant he places his order to purchase them.

Turns out that this happens when he places a larger order than can be filled
at a single exchange. After some investigation he determines that HFT traders
"see" his trade on the local NJ exchange and buy up stock at other (further
away) exchanges before said banker can fill his order at the original (lower)
price.

His solution: Send orders to multiple exchanges but delay the orders to the
closest ones so orders arrive at exchanges more or less simultaneously thus
defeating that particular HFT strategy. The coil of fiber is the method used
to achieve that delay.

~~~
davidgrenier
My understanding was that they had a software called Thor to generate the
artificial delay in sending their trades to the different exchanges.

This new exchange uses the long coil of fiber to enable all traders from
around the world to benefit from that protection. I'm wondering if they really
had to go to that extent to get the speed bump. But hey since shame has yet to
force formally verified software on anyone's radar, the long coil will
certainly do.

~~~
clarkmoody
The long coil is a hardware solution that keeps everyone honest. I have a
suspicion that the financial incentives offered to the exchange to bypass a
software delay would be too great to turn down -- especially years from now if
the original players are gone.

Edit: Oops. Maybe they can bypass the coil for certain orders. Well that
doesn't make sense...

------
remarkEon
-> Lewis declined an interview request because he is on deadline for another book project.

For those interested it looks like his next book will be about Behavioral
Economics.

[http://nymag.com/scienceofus/2016/06/michael-lewiss-next-
boo...](http://nymag.com/scienceofus/2016/06/michael-lewiss-next-book-will-be-
about-the-godfathers-of-behavioral-economics.html)

------
wehadfun
Was the 30 mile cable necessary to create a speed bump. Seems to me a few
lines of code would have worked.

~~~
ocschwar
30 miles of cable gives your customers proof the speed bump will not go away
with a software change.

~~~
fleitz
As long as they don't install a second shorter cable, and have the software
route to the second cable. The entire thing is a dog and pony show for retail
investors who are even bigger suckers than the idiots running IEX. If the
speed bump is for everyone and can't be removed then how do PEG orders bypass
it? Are PEG orders some kind of magic that travels faster than light?

Pro Tip: If a large financial institution tells you they are protecting you,
they are bald faced lying to you and you are about to get a serious lesson in
business.

The same idiots who tell you that IEX is a good thing will also sell you
actively managed mutual funds that A) under perform vanguard and B) seriously
under perform once you subtract fees.

------
cmiller1
I wonder if they're using some kind of EDFA or other amplifier for that delay
spool. For 350µsec we're talking at least 14.3dB of loss going through that
thing, in other words, only 3.7% of the signal is coming out the end in the
best case scenario.

------
esaym
On the same topic, I've actually set aside a down payment for a house, but I
probably won't be buying for another year or so. I'm wondering what is a good
way to invest this money since leaving it in the bank at less than 1% interest
really isn't doing much.

~~~
pthreads
My recommendation is to put it in something like the Vanguard REIT ETF. So if
real estate is up by the time you are ready to buy your house your investment
will likely be up proportionally. In the event you get a negative return it is
very likely your down payment might be lower as well.

Alternatively if you want to lower your risk (which also lowers your expected
reward) you may invest half in REIT ETFs and the other half in an uncorrelated
sector. Think of what sector goes up when real estate goes down.

DISCLAIMERS of course: This is not professional advice. Invest at your own
risk.

~~~
harryh
This is an interesting idea!

It might even be better to think about an investment vehicle more closely
correlated with housing costs. The main Vanguard REIT is mostly commercial
property I believe which could be somewhat uncorrelated with residential
property.

------
qaq
An infinitely more interesting question is who owns Capital Group Companies

------
tdaltonc
I wish them the best of luck.

It's easy to become resigned to finance being an insiders game. But the
efficient allocation of capital is to important to leave to "the
professionals."

~~~
murbard2
Markets do not allocate capital, they provide liquidity for investors making
them more likely to invest during stock offerings in the first place.

~~~
eru
Those are just different faces of the same coin.

~~~
murbard2
No, well functioning exchanges affect the amount of capital that gets invested
in ventures not how well it is allocated.

~~~
eru
People are looking forward. How much money individual startups can raise (or
established companies when increasing capital) depends on their expectations
of future prices on the exchanges.

------
overcast
How appropriate, the Flash Boys book just showed up from Amazon this morning.

~~~
harryh
Be sure to pair the read with the critique:

Flash Boys: Not So Fast

[https://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-...](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-
Frequency-ebook/dp/B00P0QI2M2)

~~~
overcast
Excellent, thank you!

