
IEX Group Gains Approval for Stock Exchange - anotherhacker
http://www.nytimes.com/2016/06/18/business/dealbook/iex-group-gains-approval-for-stock-exchange.html
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MichaelGG
Can someone tell me if the view in "Flash Boys: Not So Fast" is accurate on
IEX? In "Flash Boys" Brad Katsuyama says some ridiculous things, showing he
doesn't know how exchanges work. In fact, the entire book is basically
complaining that they can't trade large blocks without changing the price.

Is IEX actually doing things in good faith or are they just playing off of
people that are scared?

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jegutman
Well to be fair, those were Michael Lewis's second hand telling. I personally
know the author of FB:NSF, but haven't spoken to him in a while. I think I
agreed with 95% of what he wrote. I think IEX will likely stumble, but will
continue. The problem is not that IEX is doing something bad, but they're just
not different enough to be meaningful. They have been very good at marketing
though and brought up a lot of issues, but definitely raised some that are not
accurate.

The unfortunate problem (that's hard to resolve) is those executing on agency
will always be at a disadvantage to those executing on principal. For example
if someone wants to buy 5000 shares, they can route in a way that risks them
buying 8000 to get better prices (by sending extra orders to dark pools, etc),
someone executing on agency can never do that and so it might not make sense
for them to route to dark pools, but almost all of the routers do that
(fidelity, schwab, etc) so they disadvantage some of their customers (although
they do advantage the smallest customers). Basically I think ultimately the
reg-nms order protection is probably a little too rigid of a structure to fit
the diversity of behavior into. I'm not really sure what they're long term
hope is. I do find equities to be basically the most fair trading ground on
the exchange (which is why they had any foothold at all). It would be nice if
they were trying to disrupt the really expensive trading markets like fixed
income where the spreads are much wider compared to the risk being exchanged
and the dealers have so much leverage that they won't support anybody who is
trying to cut into that spread.

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justanewguy
FB:NSF? I get the abbreviations, but honestly i'm having a hard time
deciphering this one.

Flash Boys: NSF? Please elucidate.

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harryh
Flash Boys: Not So Fast is a rebuttal to Michael Lewis's book that basically
explains why it is wrong, point by point.

[https://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-...](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-
Frequency/dp/0692336907/)

It's quite good.

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danielvf
The original plan for IEX sounds like a wonderful extortion racket. By law,
you cannot buy or sell stock on someone else's behalf unless you check with
all major US stock exchanges first to verify that you are getting your client
the best price. IEX intentionally, massively delays answering back unless you
pay them buckets of money. Thus, unless you pay IEX buckets of money, you are
at a huge disadvantage on every stock market, not just IEX. Quite a racket.

Has anything changed with either the laws or IEX's plan since then?

Update: IEX did indeed change their proposal to remove the favored order
routing. Which still affects trades in other exchanges, and still affects
negatively effects traders on all markets, but at least its "fair" now.

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evanpw
> you cannot buy or sell stock on someone else's behalf unless you check with
> all major US stock exchanges first to verify that you are getting your
> client the best price

It's not just trading on behalf of a client. Even if you're trading directly
for yourself, you're still legally obligated not to "trade-through" a
displayed price. The idea is to protect the person who placed the displayed
order, not yourself or your client.

> IEX intentionally, massively delays answering back unless you pay them
> buckets of money

You can't pay them to avoid the delay. They delay all outgoing direct-to-
trader information and all incoming orders or cancels.

The difference between what IEX does and just placing your stock exchange 38
miles from everyone else's (350us at light speed in fiber) is that while they
delay incoming orders and outgoing data, IEX itself listens to data coming in
from other exchanges with no delay, and uses that 350us look into the future
to re-price orders before anyone else can interact with them.

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Bromskloss
> obligated not to "trade-through" a displayed price.

> The idea is to protect the person who placed the displayed orde

I'm afraid I don't understand what the first quote means and how the person in
the second one is protected. An explanation would be much appreciated.

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Lazare
> The idea is to protect the person who placed the displayed order, not
> yourself or your client.

I'm pretty sure that's wrong. I've never heard NMS/rule 611/etc described in
those terms, and logically, it makes no sense. The point of the rule is to try
and stop people eg, buying at price X when the NBBO is < X, full stop.

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evanpw
Here's my evidence that Rule 611 is more about protecting resting limit orders
than marketable orders:

1\. It's called the "Order Protection Rule".

2\. It defines "protected quotations" and makes it illegal to trade through
them.

3\. It doesn't just apply to agency trading (where you could argue that it's
meant to protect the client); it's also applicable to principal trades.

4\. There's no allowance for trading off fees or latency or probability of
getting a fill against price. For example, you can't choose buy immediately at
$10.01 on Nasdaq instead of waiting for a 30ms round trip from Chicago at
$10.00, because it's the quote on Chicago that's being protected, not you.

5\. If you send an ISO order to an exchange (which basically says "don't route
this elsewhere even if you see a better quote"), and it turns out that you
traded through a quote somewhere, the SEC will fine _you_ , because they're
protecting that other quote, not your marketable order.

6\. This quote from the SEC: "Many commenters on the proposals ... strongly
supported the need for enhanced protection of limit orders against trade-
throughs. They emphasized that limit orders are the building blocks of public
price discovery and efficient markets. ... by enhancing protection of
displayed prices, would encourage greater use of limit orders and contribute
to increased market liquidity and depth. The Commission agrees that
strengthened protection of displayed limit orders would help reward market
participants for displaying their trading interest and thereby promote fairer
and more vigorous competition among orders seeking to supply liquidity." [1]

[1]
[https://www.sec.gov/rules/final/34-51808.pdf](https://www.sec.gov/rules/final/34-51808.pdf)

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vermontdevil
_Opponents of IEX, including the other stock exchanges, have argued that the
structure of the new exchange will add unnecessary new complexities into an
already complex stock market, and potentially end up hurting small investors._

Yeah they are really looking out for the small investors. How very
considerate.

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Lazare
It may seem counter-intuitive, but...yes?

 _Small_ investors benefit from HFT and related technologies, which is why,
eg, Vanguard is pro-HFT. Investment banks are harmed by it, which is why, eg,
Goldman is anti-HFT.

~~~
vermontdevil
Maybe. But how about letting the investors and market decide? These exchanges
do not want competition and are hiding behind the "protect the small
investors" schtick.

~~~
evanpw
> how about letting the investors and market decide?

I basically agree with you, and the market has been deciding; IEX is currently
the #2 ATS (colloquially "dark pool", but IEX has been publishing quotes).
However, now that IEX is an exchange, their quotes become "protected", and all
market participants are legally required to send orders to IEX if they're
displaying the best price. It's now illegal to decide that you value a quick
response or a higher chance of getting a fill over price and choose not to
trade on IEX.

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randomname2
The SEC’s decision may not be the end of the fight. Last month, attorneys for
Nasdaq argued that the SEC could be sued if it approves IEX, saying the SEC
would first have to change its own rules to explicitly allow for a speed bump.

To this, the SEC issued an interesting response: addressing concerns about the
legality of speed bumps, the SEC separately said that delays of less than one
millisecond are consistent with its Regulation NMS.

According to the SEC [1], IEX's 350 microseconds delay is negligible, and thus
the market is automated and the quote is protected. The practical
interpretation is that the SEC has set a ceiling for what it deems the speed
race among HFT firms (with fiber optics, microwaves, lasers...)

So with this decision, the SEC has capped what technological advancement in
trading can achieve going forward, as now a 350ms delay will become the norm,
while anything below 1 millisecond is deemed a "de minimis" delay. Which is no
good for HFTs, where microseconds can mean all the difference between profit
and loss.

[1] [https://www.sec.gov/divisions/marketreg/automated-
quotations...](https://www.sec.gov/divisions/marketreg/automated-quotations-
under-regulation-nms.htm)

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evanpw
The IEX delay is uniform and deterministic, so if you're faster than your
competitors by 1 microsecond in sending an order to IEX in response to an
external event, you still win. The race that you can't win anymore is with
IEX's pegged orders, which re-price without the delay (but they're always non-
displayed).

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ycombobreaker
To add to your comment here, IMHO the situation is now worse from a technical
perspective on multiple fronts:

* IEX is still FIFO, as you point out about the race in response to external events. If Katsayuma really wanted to wipe out latency arb, he should have introduced some randomization and batching into the matching engine. I'm not sure how that would hold up from a regulatory perspective though.

* IEX quote updates will be 350us slower than any other update because of the additional input latency, which means that their protected quotes will always lag behind the market on a price flip. The amount of time that a price level is still protected on the SIP, yet practically gone, will increase as a result. This will increase the amount of time that DAY ISO orders are necessary for establishing the new price level, and therefore will benefit the HF shops which can leverage DAY ISOs the best. This also possibly creates a moral hazard for noncompliance.

* Other exchange owners have expressed interest in adopting a shoebox-like system, because of the expectation that delayed quotes will _force_ more market participants to trade on that exchange. If multiple systems start generating lagged quotes, the first problem continues to get worse.

* IEX's pegged order type relies on the SIP. But now that IEX itself will become a part of the SIP, the shoebox delay will have a feedback effect of lagging its own peg updates. Likewise, if other updates start delaying their output, IEX pegs may become less useful. I'm not exactly sure what the net effect of this will be (after a few years of other exchanges adapting)... but I don't expect it to be "good" for the system as a whole.

In general, I believe that artificial introduction of latency into the
National Market System seems only to serve special interests: advanced
technological traders (usually HFT itself), and the exchanges which enact the
artificial latency.

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randomname2
Citadel is not happy:

“Today’s decision will test and potentially reverse the gains in fairness,
efficiency and transparency that have been made to our markets over the last
decade. We must be vigilant to identify unintended consequences, and firm in
our commitment to equitable and consistent treatment for all investors.” [1]

[1] [http://www.reuters.com/article/us-usa-sec-iex-
idUSKCN0Z32NM](http://www.reuters.com/article/us-usa-sec-iex-idUSKCN0Z32NM)

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vasilipupkin
Nothing to see here. The only people affected are other exchanges who get more
competition

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grondilu
If the goal is to avoid high-frequency trading, why not use a blockchain-like
technology?

~~~
Lazare
When writing a comment about the blockchain, it's always useful to mentally
replace it with the words "distributed database", and see if still makes
sense.

"If the goal is to avoid high-frequency trading, why not use a distributed
database"? Maybe because that would have absolutely zero impact whatsoever on
high-frequency trading?

(Also, the goal isn't really to avoid high-frequency trading, and it's quite
likely IEX will create more opportunities for high-frequency trading, not
fewer, but that's another matter.)

