
Plan for New Stock Exchange Stirs Debate - greeneggs
http://www.nytimes.com/2015/11/17/business/dealbook/plan-for-new-stock-exchange-stirs-furious-debate.html
======
unabridged
Forget adding speed bumps, frequent batch auctions are the way to go. Group
orders every second and match trades (and maybe give priority based on
volume). There is no reason any company or trader cannot commit to price for
1s and it completely eliminates high frequency shenanigans.

~~~
fragsworth
It shifts the problem so that every bot is waiting for the end of each second
to gather as much information as possible from external sources before placing
its orders. So when a human trader places a market order, they will have a
disadvantage equal to the volatility over 1 second. By contrast, in a real-
time market, the HFT bots make your market orders very close to the current
price everywhere else.

It's not clear to me that batching actually solves all our problems. It might
be better, but it doesn't seem 100% clear cut.

~~~
mkehrt
Maybe randomly pick an auction length from like 0.5 to 1.5 seconds each time,
so you don't know what batch you're in?

~~~
unabridged
There is currently a dark pool using a similar method:

"The London Stock Exchange’s Turquoise Midpoint Dark Pool has a service known
as Uncross, which matches orders at the midpoint of the bid and offer with
auctions held randomly every 5 to 10 seconds."

[https://blogs.cfainstitute.org/marketintegrity/2014/11/10/ar...](https://blogs.cfainstitute.org/marketintegrity/2014/11/10/are-
frequent-batch-auctions-a-solution-to-hft-latency-arbitrage/)

~~~
gd1
Which is kind of the point. If people think that rolling auctions are better
than a CLOB, they are free to set up exchanges that use auctions and see if
anybody trades on them.

Spoiler: No one will.

Or are they arguing that the government should step in and tell people how to
trade?

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Animats
The EU is imposing a tax on financial transactions effective January 1,
2016.[1] The tax is tiny (0.1% on most transactions, 0.01% on derivatives) but
enough to discourage high frequency trading. It's going to be interesting to
see how that works out.

[1]
[https://en.wikipedia.org/wiki/European_Union_financial_trans...](https://en.wikipedia.org/wiki/European_Union_financial_transaction_tax)

~~~
PhantomGremlin
_The EU is imposing a tax on financial transactions_

The devil is in the details, but at first glance that looks like an absolute
disaster in terms of stock trading. For example, if a mutual fund bought a
stock twice in a year, and then sold that stock twice in a year, that's 0.4%
being gifted to the government right there? From just that mutual fund. And
another 0.4% from whoever is on the other side? Wow!

Am I reading that right?

Also it says "financial institutions" but looks like it will also apply to
individuals. The Wiki page says _" If acting on behalf of a client, e.g., when
acting as a broker, it would be able to pass on the tax to the client."_

I think that could dry up trading volumes by about 95% in the affected
countries. For example, when I sell stock now, a market maker takes the other
side. But he won't want to if he has to pay 0.1% for the privilege. So now I
can't sell a stock to an intermediary? I need to wait for another investor or
a mutual fund to take the other side of my trade?

What am I missing? That can't be right?

Edit: one immediate thing that sticks out is that "derivatives" will be
created to replace stocks, since the tax savings is about 90% by doing that.
For example, let's say a stock costs $10.00. Why not create an "American
style" call option on that stock, strike price $0.01, expiration date 2099.
The value of that option is $9.99. But the tax rate is 0.01% on the
derivative, vs 0.1% on the stock itself. Someone hasn't thought things through
here.

~~~
parennoob
> if a mutual fund bought a stock twice in a year, and then sold that stock
> twice in a year

I think the idea is that such moves contribute to the instability of the
market as a whole, and hence should pay a small penalty for it.

> I think that could dry up trading volumes by about 95% in the affected
> countries.

Yes, it is not entirely clear that large trading volumes contribute anything
positive to the economy as a whole. There are real people _somewhere_ in the
picture who are trying to buy/sell shares in regular and are getting shafted
in terms of either buying price or trading fees by high-frequency bots. The
tax should even out things a little bit for the average person.

~~~
rhino369
Buying and selling don't contribute to market instability.

------
DeanWormer
The Citadel letter mentioned in the article
([http://www.sec.gov/comments/10-222/10222-16.pdf](http://www.sec.gov/comments/10-222/10222-16.pdf))
is a very good read. I work in the industry and they hit all the main problems
with IEX's approach.

~~~
hackuser
> This damage to market quality would be further magnified by the “fast pass”
> that IEX proposes to give its affiliated routing broker-dealer (the “IEX
> Router”) and its pegged order types. It is ironic that IEX—a company
> supposedly founded to protect investors from various types of latency
> arbitrage—now proposes to offer pegged orders and IEX Router services that
> can and will be used by sophisticated trading firms to arbitrage the latency
> that IEX itself would create.

Could you explain this in more general terms? Especially,

1) Does IEX propose to exempt some traders from the delay? Isn't that
obviously worse than no delay at all?

2) What are "pegged orders"?

Also, if you don't mind being spokesperson for an entire industry, is there a
sense that when we are debating 350 microseconds, things are a bit absurd?

~~~
dmschulman
I just finished reading Flash Boys by Michael Lewis, it was an incredibly
enlightening read. To answer your questions:

1) I think it's 350mcs across the board except in the case of firms which
conduct suspect activity (canceling orders frequently for example). Adding the
delay institutes a level playing field across anyone trading on the exchange.
The basis of HFT is leveraging faster connection speeds to gain insight into
other's trading strategies and exploiting those strategies, all before the
other firm's trade reach the exchange. This is a HIGHLY simplistic explanation
dealing with one form of arbitrage and given for brevity on the subject.

2) EDIT: the other guy explained this better!

To your point about 350mcs being absurd to argue over, HFT firms manage
regular trading speeds in NANOSECONDS. Look at 350mcs in those terms (350,000
nanoseconds) and it's not such a small number anymore.

~~~
MichaelGG
If you thought Flash Boys was enlightening then you didn't read carefully. He
makes shit up.

Take the one example of a trader that claims the market jumps just by he
entering a symbol and quantity- not submitting the order. That's _huge_! It
means espionage in a major trader's office! But since Lewis knows it's just
bullshit coincidence, he just says "oooo spooky HFTs".

Flash Boys: Not So Fast is a far better book. And even better, it's actually
acurate.

Lewis's book is just an ad for IEX, hoping to scare ignorant people into
worrying about perfectly fine stuff. The star, Brad, in his first scene, is
_shocked_ , just _shocked_ , that his 50,000 order could cause price impact.

(Think: the customer paid 5 cents (2500$) to get Brad to sneakily sell the
shares - obviously price impact is to be expected.)

There are plenty of cross markets, and nothing stops anyone from running a
5-second auction (with simple pro rata or complicated rules like POSIT). But
IEXs investors just think coiling 38mi of fiber is neater. At least it makes a
cool display for data center visits.)

~~~
eru
> Flash Boys: Not So Fast is a far better book. And even better, it's actually
> accurate.

I just read it on a recommendation from HN. Entertained me on a longhaul
flight. Boy, does the author take apart Flash Boys. Alas, approximately no one
will ever read this deconstruction.

------
drham
I'm pretty naive on this topic, but wouldn't adding an artificial delay only
create more opportunities for arbitrage vs other exchanges?

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danharaj
> Those companies have all said that IEX will introduce one more complex
> wrinkle that will end up benefiting one set of market participants over
> another, rather than leveling the playing field.

Is there a notion of fairness that is both canonical and pins down one market
structure as fairest?

~~~
AnimalMuppet
I don't think there's any such notion of fairness. But if there is...

There's a saying to the effect that "anything is difficult to explain to
someone whose income depends on not understanding it". The hypothetical
perfect notion of fairness will face many people giving fine-sounding but
self-serving explanations of why it is not actually fair.

~~~
danharaj
I agree. There's also that fairness can be applied to the social structure
that generates the rules for the market. Suppose that there is a fairest
market structure. We may even call it the "free market". It may be the case
that you can enforce the structure of the free market on everyone else, but a
lot of people would be rather angry with you if you did it like a violent
dictator.

So it may be the case that a system that tries to enforce free market
conditions must be allowed to deviate from that ideal in order to be itself
fair.

------
hackuser
In case anyone initially overlooks it, as I did: The proposed delay is 350
_micro_ -seconds, or millionths of a second, not the _milli_ -seconds that
ping measures for me.

If the question is whether a 350 microsecond delay is acceptable and whether
it's fair to small investors, we're asking the wrong questions. For example,
should HN introduce a 350 microsecond delay to posting comments? Would that be
fair?

(In the correction at the bottom, you can see the NY Times made the same
mistake I did.)

~~~
powera
If I'm not mistaken, this is all people who will make less money because of
this change claiming that "some other people" will make less money because of
this change. It would be considered "FUD" if it was a Silicon Valley company
saying this.

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zaroth
I can't believe so much is written about 350 usec in delay. I mean, that must
be the least controversial change you would ever make.

If someone wants to make an exchange with static added latency, that's not the
same as making everyone's latency the same, which the article conflates. The
change is nearly pointless, and they argue it to death.

There are much more interesting things going on with exchanges than this.

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oconnore
What if you just accept algorithmic trading, and allow companies to upload an
"agent" that handles trades for them?

Each agent, running on a standardized VM, can be given the same amount of CPU
cycles, the same standardized data feed, and logically run in the same time
slice. Companies can add real time data to the feed, but it is also available
to everyone else. Private data is delayed by a second or so, as are new agent
uploads.

