
A trading platform that outlaws what it sees as abusive practices  - galaktor
http://www.theverge.com/2015/7/2/8877203/this-man-is-building-a-stock-exchange-that-will-screw-you-over-less
======
tptacek
_In 2006, if I saw 100,000 shares of AMD offered, and I wanted it, I could go
out and buy it. It was a simple as that. In 2007, if I tried to buy 100,000
shares, I would get 80,000. Then in 2008 I would get 60,000. The market is
showing me a volume at a price that I can no longer buy or sell at. I can’t
buy or sell what I see on my screen._

Another way to put this:

"Once upon a time, I was paid a fortune by a giant investment bank to move
large blocks of stock on behalf of their spectacularly wealthy clients. As
recently as 2006, if one of those clients needed me to move a block of 100,000
shares, I could do that at literally the click of a button. This despite the
fact that I earned a commission on the trade; it must have been a very
expensive button my bank owned! And this despite the fact that my 100,000
share order was bound to move the market, and so I was in effect acting on
inside information. But that's just how this is supposed to work, right?

"Anyways, the markets evolved, and my giant investment bank could no longer
earn massive commissions just by pushing a single button. Even though I knew
my giant hedge fund clients were going to dump vast numbers of shares on the
market, depressing prices for all the other investors, the markets no longer
allowed me to trivially profit from that information! My 100,000 share orders
get broken into small numbers of lots just like everyone else's. No fair!"

"So I started a new exchange to rewind the markets back to the glorious,
equitable, fair, transparent days of 2006."

~~~
x5n1
whose money do you think is in those hedge funds? it's all a question of what
game you want to play. the players are always the same. it's capitalism after
all.

~~~
tptacek
Whose money do I think is in those hedge funds? I don't know, a whole bunch of
millionaires?

If the direction you're heading is "modern trading is scalping profits from
pension funds and mom-and-pop mutual fund retirement plans", you'd probably
want to be prepared to refute Vanguard's chief investment officer, who says
HFT has in general improved outcomes for one of the world's largest and most
trustworthy fund managers.

~~~
mrchicity
They may scalp profits from hedge funds that trade actively, but guess what,
they're playing the same game: trying to trade at attractive prices. With two
pros competing with one another, why does one side deserve sympathy? I don't
see Burger King whining to the press when McDonalds outearns them.

For the average passive indexer who buys some ETFs or mutual funds every
quarter it's meaningless at worst, and probably a net benefit since these
products have tighter prices now.

~~~
tptacek
I think we're saying the same thing.

------
yummyfajitas
It's pretty silly to describe IEX as curbing "abusive" practices.

What IEX is attempting to do is build a platform where large traders can move
lots of shares while their smaller counterparties are stuck absorbing the
price impact. This is potentially useful for large traders (e.g. Goldman, JP
Morgan and Citi, as mentioned in the article) but bad for small traders.

What's actually kind of "abusive" is IEX's marketing - they are encouraging
unsophisticated investors to direct liquidity to them rather than having
brokers route for best execution.

[http://www.iextrading.com/insight/letter/](http://www.iextrading.com/insight/letter/)

This letter directs your broker to route your trades to IEX, rather than the
best available venue. This means you may be stuck paying IEX fees - which
could be greater than other venue's fees - and of course, you are providing
liquidity to sharks who want to make sure you absorb the price impact of their
trades.

~~~
jasode
I think what you're saying is, in essence, IEX's current incarnation of
handling stock transactions does not exist in a vacuum -- because they are
only a trading _technology platform_ instead of an _exchange_ like NYSE &
NASDAQ. As a technology platform, they are really just "clients" of other
exchanges and therefore, they're the tail trying to wag the dog.

If they become a full-fledged exchange with stocks listings exclusive to IEX,
then those stocks would have better "fairness" characteristics that Brad
Katsuyama claims.

Therefore trading AAPL through IEX may incur a financial penalty for being on
the "slow" IEX system but trading YC2019Unicorn stock exclusive to IEX may
not.

~~~
yummyfajitas
Actually, what I'm saying is the following. Don't put resting orders out onto
IEX - a big player will take your liquidity in a big trade and you'll suffer
the inevitable price impact. I.e., putting your orders on IEX rather than the
open market is just a way to funnel your money to JP Morgan.

It's far better to mingle your orders with HFT orders - that'll keep the big
guys honest. You'll probably also pay lower fees.

------
kasey_junk
> They could see my order at BATS, race me to the next exchange, and cancel
> all their sell orders and buy whatever is left, buy everything up, then turn
> around and try and sell stock back to me at a higher price. So that was the
> game.

This is the heart of the problem with IEX's explanation of the markets, and
why I think most people view HFT as unfair. But its not how cross exchange
market making actually works. The HFTs are not rushing to buy up existing
inventory from others who are selling it, in an attempt to screw others. They
are the ones who are originally offering to sell it in the first place. They
aren't rushing to buy, they are rushing to change the price of their
inventory.

The metaphor I like to use is that of a chain of gas stations running down a
highway, owned by the same people. If a tanker truck pulls up at the first two
and buys up all their gasoline, it would be perfectly reasonable for those
first 2 to call ahead to the rest down the highway and tell them to raise
their prices, as they clearly were being used to supply someone else's
industry at lower prices than they should.

That phone call is what IEX prevents, so that their customers (guys with big
tanker trucks) can buy gas without impacting the price of gasoline.

~~~
digikata
Why would a HFT maintain a huge inventory of stocks? If you make money on the
ability to execute trades faster than others on the movement of stocks, you're
losing money by holding them. It feels akin to a car maker holding an
overlarge inventory of parts - it's just tied up capital that's not making you
money. In HFT, don't you maximize the profit by holding as few stocks for a
little is possible?

~~~
kasey_junk
The short answer is that they have to. Resting orders from yesterday are
always faster than microsecond orders from right now.

So a market maker that was super fast but didn't rest orders, would be
competing with one that is as fast as them and willing to rest orders. So, the
resting order ones win and drive out the non-resting order ones.

------
joshu
if you have continuous trading, you are going to have complicated interactions
(such as outlined in the article.)

instead, an occasional crossing (once a day? once an hour?) would provide much
more "fairness" since everything happens at once, at the expense of
"timeliness".

back when I worked in this industry (a decade ago) POSIT provided something a
lot like this

you can't have it both ways, though.

~~~
JesperRavn
Their system is not fundamentally different from discrete trading, since they
have delay lines going into and out of their servers. So while everything is
continuous, if you want to observe the market, then do a trade, then observe
the result of that trade, etc. there is maximum rate you can do this.

This is what prevents front running[0], according to my understanding. Once
you submit an order, no one can react to that information within a time
greater than round trip latency to the servers.

The problem with crossing at discrete intervals is that it introduces new
kinds of strategic considerations that make it much more complex for people to
play the "game".

EDIT [0] For the sake of the pedantic, I mean front running _in the sense of
the article at the top of this page, not the legal sense_. The article defines
a notion of front running that maybe not everyone agrees with, but that is
what I am referring to.

~~~
yummyfajitas
_This is what prevents front running, according to my understanding. Once you
submit an order, no one can react to that information within a time greater
than round trip latency to the servers._

That's not correct. Front-running is the crime by which _your broker_ trades
ahead of you after you state your intent to trade. Your broker does, in fact,
see your trades before they reach the market (the broker is actually the one
pushing them to the market). It's mainly a crime because your broker has a
fiduciary duty to act in your best interest, and because the broker occupies a
privileged position as an intermediary, not because there is something
inherently wrong with demand anticipation.

Of course, it is correct that no one besides your broker has the physical
ability to react to that information.

~~~
JesperRavn
But if someone, somehow, developed a legal technical means to eavesdrop on the
order you sent to your broker, and traded based on that, wouldn't it be fair
to say that this is, in some sense, similar to front running? That is what the
article is claiming, although the information is the information available at
one exchange before it reaches another.

And going on with this analogy, wouldn't it be the case that we would want to
prevent this eavesdropping if possible, because it has a similar effect to
actual frontrunning, namely that the intermediary captures the information
rents associated with your knowledge of the order you are about to submit.

~~~
yummyfajitas
The purpose of laws against frontrunning is to enable you to have a trusted
relationship with your broker. There is no benefit to creating a trusted
relationship with your adversaries.

Similarly, doctor/patient confidentiality laws are there to created a trusted
relationship and make you comfortable admitting to your doctor that you had
unprotected sex with lots of heroin addicted hookers in sub saharan Africa and
you now need all the STD tests. In contrast, passing laws against journalists
reporting on who visits hookers has no such benefit.

~~~
JesperRavn
I really don't care about the law. The point is that if front running was
legal, brokers would try to find ways to guarantee to their clients that they
wouldn't do it. Similarly, the guy in the article advertises his exchange as
preventing the equivalent of front running at the exchange level.

~~~
mrchicity
Their ATS can only exist by free-riding on the public price discovery in
displayed US markets under Reg NMS. They protect their customers from trading
at "wrong" prices by letting traders on faster exchanges determine what the
"right" price is for them.

As a thought experiment, imagine IEX captured 95% of market share as a
displayed exchange. The 350 microsecond delay wouldn't matter since it's
applied to everyone and there would be no reference markets for them to price
against. It'd just be another market with a slightly slow matching engine.
Relative speed still matters so fast traders would have an advantage.

------
hackuser
'Safe' markets are valuable even for insiders, because they attract more
investors and volume. People naturally want to invest where they won't be
cheated.

That has been forgotten in the (largely manufactured, IMHO) anti-regulation
outrage. Even the big Wall Street firms should benefit from regulation that
makes non-insider investors feel the market is safe enough to invest in.

That said, I'm confused and my theory fails: Despite the long run of
incompetence and fraud on Wall Street, its reputation as the leading place to
invest and for expertise seems to persist and it has resisted regulation to a
great degree. You don't hear people say, 'don't invest in the stock market
because you'll be cheated'; or 'don't hire (some major Wall Street firm)
because look how they cheated these other people, and they demonstrated
complete incomptence in events X and Y'. Their reputation seems immune.

Maybe there are no better options.

------
dcaisen
Dan from IEX here. For folks genuinely interested in US equity market trading
dynamics, this paper out of Columbia is an awesome primer. More objective than
flash boys or what you'll read in the news.

[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580002](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580002)

------
Donch
Read "Flash Boys" for a better insight into how much difference variable
latency between exchanges and clients makes to the profitability of fast
execution of trades.

[https://en.wikipedia.org/wiki/Flash_Boys](https://en.wikipedia.org/wiki/Flash_Boys)

~~~
tptacek
Flash Boys is a god-awful mess. Two better alternatives:

Kovacs' _Flash Boys: Not So Fast_ which in the best possible way reads like a
long-form ELI5 Reddit post about modern trading and all the WTFWAT moments in
Lewis' book: [http://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-F...](http://www.amazon.com/Flash-Boys-Insiders-Perspective-High-
Frequency-ebook/dp/B00P0QI2M2)

Patterson's _Dark Pools_ which tells the story of Island and the ECNs and the
advent of automated trading. Patterson is more ambivalent about HFT than
Kovacs, and does a good job of explaining the Core Wars phenomenon of modern
trading from '98 to the mid-'00s.

~~~
Donch
Read all three! Thanks for the reading list extension and gratuitous downvote
:-)

~~~
cpach
As you very well know, HN votes are anonymous. Why make assumptions about who
voted? It doesn't contribute to the discussion at all.

------
res0nat0r
I'm no stock expert, but I still don't see how people are getting "screwed" by
hft. If you are concerned about a price fluxation just place a limit order.
Simple as that. If you don't care, then place a market order. There's always
been someone out there with more information, smarter people, and now faster
connections than you. It's never been a level playing field and will never be.

~~~
avz
The fundamental idea of algorithmic trading doesn't really fall into the
category of screwing-people-over. However, some techniques employed by
institutions engaged in it can easily be seen as outright cheating. One common
example is front running [1] where a player with access to real-time order
information exploits the knowledge of pending trades from other players to
turn a profit at the other players' expense. These techniques can also be used
across exchanges.

The issue is a consequence of the lack of market transparency. The exchanges
are only required to make order information public with a significant delay.
However, they sell the real-time order information to a few market players
enabling them to engage in the dubious tactics at the expense of other
players.

Note that tactics like front running used to be employed by brokers before
algorithmic trading and have since been banned.

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

~~~
tedks
>The exchanges are only required to make order information public with a
significant delay. However, they sell the real-time order information to a few
market players enabling them to engage in the dubious tactics at the expense
of other players.

It's easy to see why you view this as unfair.

But it is fair. Anyone can buy the real-time information if they have the
capital.

Obviously markets are going to be more friendly towards you the more money you
throw at them.

Just like everything else in capitalism, the fairness comes from anyone being
able to have money. If you think this is unfair, you're essentially opposing
capitalism.

~~~
MereInterest
I'm having a hard time figuring out whether you are being facetious or not.
What you are describing is nepotism and bribery, not capitalism.

