
The 'Flash Boys' Exchange Is Growing Up - evanpw
http://www.bloombergview.com/articles/2015-09-16/the-flash-boys-exchange-is-growing-up
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wdewind
I am deeply confused by IEX. It seems like anyone who knows anything about HFT
thinks the narrative proposed in Flash Boys is completely ridiculous and
mostly incorrect, including what Brad Katsuyama says. Is there something else
interesting about IEX that people outside the industry don't really
understand, or is it an entire company of people who have deeply flawed ideas
about HFT and how it works?

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kasey_junk
Just because Flash Boys presents modern electronic exchanges incorrectly, does
not mean that some people aren't worse off in the modern HFT world.

In particular, large block buyers, who previously got to take advantage of
inefficient price discovery to get better prices have been negatively
impacted. It is in their best interests to make it possible to buy a very
large amount of traded products without the price changing.

IEX is built from the ground up for those market participants and none of them
have any misunderstanding about how the market works. They just don't like it.

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wdewind
Right, that makes sense, but Katsuyama and Lewis both present IEX as a morally
superior, cleaner stock market. It makes sense that large block traders would
want a different way to do large block trades, but why not just see it as an
alternative financial product that has some demand just like the regular stock
market, instead of making it a moral issue? I guess my question is, do the
people who work at IEX drink the Kool Aid?

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harryh
The large block traders need someone to trade with.

By making it a moral issue, IEX can attempt to trick suckers into joining the
market so that the large block traders can take advantage of them.

Watch this video (put out by IEX) and think about how it's trying to
manipulate people:
[https://www.youtube.com/watch?v=v2OZkTesSx0](https://www.youtube.com/watch?v=v2OZkTesSx0)

~~~
zhte415
From some content presented in Flash Boys, a question:

Why would large block traders like to trade with someone pinging the market
for 100 buy/sell orders, waiting for discovery, and then changing the price on
other markets from information gained from these pings? If the market were rid
of these pings, as the 350ms delay is intended to do?

Or to put the same question another way, why would a large block trader not
like all trades being done at the same price or at a better or equal price on
other exchanges (discovered by IEX) rather than some of the block done at the
original price and the rest done at a higher price because 'liquidity' was
provided by HFTs driving up/down prices on other markets and then
selling/buying from the large block trader this 'liquidity'.

~~~
harryh
See the comment up thread from kasey_junk:

"In particular, large block buyers, who previously got to take advantage of
inefficient price discovery to get better prices have been negatively
impacted. It is in their best interests to make it possible to buy a very
large amount of traded products without the price changing."

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chollida1
To lay the ground work for what's going on here....

In the US you can be an ATS(Alternative Trading System) or a full blown
exchange. All dark pools are ATS's. This gives you a bit more leeway in terms
of what you are allowed to do, ie hide orders, trade only at midpoint, trade
only at certain volume's etc, even report trades in a slower fashion.

A full blown exchange has alot more scrutiny but comes with one huge caveat,
all other exchanges must route orders to you if you have the NBBO(National
Best Bid or Offer) as dictated by the SEC's REG NMS 611.

This means if an order to sell comes to the NYSE for 5.00 and takes out the
entire first level forcing the NYSE to have a bid of 4.99 and there is still
more volume in the order, the NYSE has to send the order to another exchange
still showing $5.00 as its bid.

Since the exchanges make money when each share is traded they don't really
like to do this( as a side note, this is how flash orders came about,
exchanges "flashed the order to a select few market makers for 50 milliseconds
before sending it to another exchange giving the market makers a chance to
fill it, and keeping the commissions at the exchange, people got pissing about
it and it no longer happens).

If IEX transitions from being a dark pool to an exchange this requirement to
use their quote as part of the NBBO might mean more liquidity, and hence more
profit, for them.

The issue with this is that IEX is the first proposed exchange, atleast to my
knowledge, that has an intentional built in delay, meaning that its quotes are
by design slow and stale as compared to the other US exchanges.

They are arguing to the SEC that since the NBBO is determined by the SIP(the
system that aggregates all other exchanges quotes to determine what the NBBO
is), which itself is slow, that this doesn't really matter much.

On the other side of the debate is a literal whose who of the finance world,
not just HFT's, arguing the slipper slope defense, ala well if they delay 350
microseconds, what's to stop someone from having a 2 second delay or 1 day
delay in showing quote.

I don't really have a dog in this fight but most people I know believe that
IEX is going to lose this fight, though there is a loud contingent at the SEC
itself that wants IEX to win to act as a test case for what the SEC can do to
shape the market microsructure of the US cash equity markets.

As to becoming a place to list your company, I think Levin is right here... no
one cares at all what exchange the company is listed on, even the company
itself.

 __EDIT __replaced ECN with ATS above

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evanpw
> All dark pools are ECN's

This isn't quite true. Every dark pool is an ATS (alternative trading system).
An ECN is a different kind of ATS that displays its quotes publically, unlike
a dark pool. I don't think there are any ECNs left that have any kind of
volume (since LavaFlow shut down in January).

~~~
chollida1
Yikes, you are 100% correct. I appreciate the correction!

[https://www.sec.gov/divisions/marketreg/mrecn.shtml](https://www.sec.gov/divisions/marketreg/mrecn.shtml)

I blame wikipedia which says:

> ECNs are sometimes also referred to as alternative trading systems or
> alternative trading networks.

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a-dub
What would happen if you split the tick interval to three 30 second intervals,
where during the first interval new orders are collected in private, the
second serves as a 30 second waiting period, and at the third all previously
private orders and matches/trades are made public and broadcast?

So collect (30s) -> wait (30s) -> broadcast (30s) -> collect...

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jplewicke
One of the better proposals to fix whatever market structure issues we have is
to move to "frequent batch auctions", in which a micro-auction would occur
every 30 seconds or minute, which would amount to a similar thing. I'm not
aware of any research that discusses whether such a system would be workable
in the presence of the existing continuous trading market.

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harryh
There is research on this. It won't work the way you hope. Here is the
problem:

What happens if in a single batch you have more buy orders than sell orders at
a given price (or vice versa)?

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a-dub
One side eats up all the liquidity on the other side and the price moves
appropriately in the next tick?

It would clearly have to be separate from the high frequency discrete market.
(c'mon, don't call it continuous!)

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harryh
On the side where all the orders aren't filled how do you decide who gets
filled and who doesn't?

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a-dub
At equal prices, random selection. Anything else seems like it could be games.

Could lead to some funny movements though. Value aliasing! : )

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harryh
So lets say at tick one 1 see that only 50% of the buy orders were filled.

At tick 2 I want to buy 100 shares. But maybe I'll guess that only 50% will be
filled this tick too, so maybe I should submit a buy order for 200 shares
instead? This kind of game playing can lead to highly unstable outcomes.

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sabalaba
I wonder why they're using a "magic shoebox" instead of a call market a la
[http://ai.eecs.umich.edu/people/wellman/?p=40](http://ai.eecs.umich.edu/people/wellman/?p=40).

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kasey_junk
Because call markets don't actually solve any of the supposed problems of HFT.
Unless the call market has a global monopoly (an impossibility that we
wouldn't want if it were available) venue arbitrage is still an issue.

Further, no one who proposes call markets ever talks about the matching
algorithm in the face of order book imbalances. How you do tie-breakers can
either still have speed advantages or has other probably worse disadvantages.

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vasilipupkin
neither does their magic shoebox. It doesn't solve anything and HFT firms
aren't meaningfully impacted by the shoebox

