
'Flash Boys' Exchange Isn't About the Little Guy - kasey_junk
http://www.bloombergview.com/articles/2016-02-25/-flash-boys-exchange-isn-t-about-the-little-guy
======
kolbe
As a side note, if you are an outsider who is at all interested in finance and
are a well-educated person, Matt Levine (the writer of this article) is one of
the finest sources of information. His articles are accessible, thorough and
well thought out.

~~~
thatsaid
This is usually true; but in this case he's parroting a data "analysis" that
excluded 99+% of IEX's orders. Essentially, in < 1% of types of trades, IEX
underperforms, in the rest it outperforms.

However, the IEX opponents decided to pretend that this minuscule fraction of
trades was important, and Matt Levine was either careless in believing this;
or he purposefully wrote a dishonest and misleading article.

I won't state which it is, but he's a smart guy... it's hard to believe that
he'd make such an egregious error by accident.

~~~
pgwhalen
Huh? He explains this all in the article very clearly. He addresses the issue
Citadel brings up but then demonstrates how unimportant it is to retail
investors.

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theseatoms
Of course not. The pre-existing, traditional exchanges are about the little
guy. A retail investor can now buy or sell a stock with unprecedentedly low
execution slippage.

The current HFT-driven market penalizes haphazard execution of much larger
orders.

~~~
jonknee
> The current HFT-driven market penalizes haphazard execution of much larger
> orders.

Many of which are made on the behalf of the little guy (through pension or
mutual funds).

~~~
tptacek
The largest and most reputable of which funds publicly support HFT driven
trading/execution/market-making. I guess it depends on how much you trust
Vanguard. I trust them a lot.

~~~
patio11
Thomas brings this up a lot in these threads; I appoint myself the designated
copy/paster of the URL:

[https://www.sec.gov/comments/s7-02-10/s70210-122.pdf](https://www.sec.gov/comments/s7-02-10/s70210-122.pdf)

Choice quotes:

 _As the number of trading venues increases, discrepancies in prices across
those venues will naturally result. The price discrepancies across multiple
markets create an opportunity for nimble traders to make a small arbitrage
profit by scouring the markets for these discrepancies and eliminating them.
As the number of trading venues expands, the number of such arbitrage
opportunities increases. So, it is not surprising that we have seen a
tremendous increase in trading volume over the past decade, and that the
activity is increasingly dominated by "high frequency traders." While Vanguard
does not engage in this type of trading, we recognize that such trading has a
positive impact on the markets at large, including longer term investors. Such
arbitrage trading enables investors to get a fair price across market centers.
Vanguard believes that the market structure changes facilitated by the
Commission's various regulatory initiatives and the "knitting" together of the
marketplace by "high frequency trading," have led to a significant decline in
transaction costs for long-term investors over the past ten years through
increased liquidity and tighter bid-ask spreads. _

and

 _Various groups have attempted to quantify the reduction in transaction costs
over the last ten to fifteen years. The Commission will continue to receive
this data throughout the comment period. While the data universally
demonstrate a significant reduction in transaction costs over the last ten to
fifteen years, the precise percentages vary (estimates have ranged from a
reduction of 35% to more than 60%). Vanguard estimates are in this range, and
we conservatively estimate that transaction costs have declined 50 bps, or 100
bps round trip. This reduction in transaction costs provides a substantial
benefit to investors in the form of higher net returns._

~~~
theseatoms
Thanks. I was going to ask for a citation. Vanguard is 100% correct, though
there should probably be fewer exchanges in the first place.

~~~
tptacek
There should be fewer exchanges and less competition? Why?

~~~
theseatoms
On exactly what front are exchanges competing? Order types? Fees? Volume?
Differences in any of these are very often opaque to the customer.

From what I've seen, exchanges are basically functionally equivalent, since
they provide a utility-like service. And, as Vanguard points out, more trading
venues means higher market frictions and costs.

TBH I'm still trying to forming a strong opinion on the issue, as indicated by
"probably" in my initial comment. And I think it's a topic worth discussing.

~~~
gnaritas
It doesn't matter if it's opaque to the customer or if every exchange is
selling an identical product; there's reason for multiple exchanges to exist
to avoid monopoly. Multiple players want to play in the market, that means
multiple exchanges. Saying there should only be one exchange is picking a
winner and giving them the entire market.

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randomname2
USA Today did a profile today as well:
[http://www.usatoday.com/story/money/2016/02/25/why-wall-
stre...](http://www.usatoday.com/story/money/2016/02/25/why-wall-street-hates-
man/79518728/)

Interestingly IEX's application has attracted 388 comment letters, with 99%
supportive and Citadel's one of the handful against:
[http://www.nanex.net/aqck2/4709.html](http://www.nanex.net/aqck2/4709.html)

For contrast, the BATS application received 3 comments only.

~~~
elecengin
A bit disingenuous - the handful against include major exchanges like NYSE and
BATS as well as major trading firms like Citadel.

You could argue that these are direct competitors of IEX and therefore have a
vested interest in preventing the new exchange - or you could argue they are
best suited to see the holes in the application.

Keep in mind that previous exchange applications have went through without
this level of discussion. You could argue that this is because the other
exchanges are "scared" of IEX. Or... consider the possibility that IEX's
application has some faults. For example, much of the focus has been on IEX's
smart order router not following the same rules as all the other exchange
participants. The argument is too nuanced to summarize here... but you should
never decide an argument based on number of responses!

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chuckcode
Title is a little misleading. The article is seeking to refute a letter from
Citadel opposing the establishment of IEX ('Flash Boys' exchange) on the
grounds that it is not as efficient for the smaller retail investor. Article
explains how 1) many of the retirement funds and institutional investors do
actually represent the little guy 2) why exchanges that encourage HFT are
costing all of us with retirement funds lots of extra dollars.

I for one would like to see traders compete something other than speed and
hope to see the IEX up and approved as an exchange sooner rather than later.

~~~
tptacek
One problem with arguing that HFT is costing retirement funds lots of extra
dollars is that it's simply not true; in fact, the opposite is true.

~~~
bcg1
This might be true on a micro level when it comes to order execution, but on a
macro level the costs have yet to be determined. HFT in its current form has
not really been through a market downturn, and the way in which the algorithms
interact with each could turn out to be very detrimental to markets (and by
extension retirement funds) as a whole.

~~~
tptacek
What is "HFT in its current form"? If you're going to project some harm from
automated electronic trading, I think you need to be specific about both the
form of trading you're concerned about and the harms it might visit on the
market.

~~~
bcg1
By "in its current form" I mean whatever growth & developments have been
implemented in the industry since 2009, and to a lesser extent since 2011.

I'm not an insider or an expert, and I'm sure there are many nuanced arguments
for and against individual use cases. I'm really just trying to point out that
there it is not clear what the systemic risks are, or how algorithms will
behave in a market that is drastically different than the what we've seen in
the last 4 years. It is impossible to test a system like this as a whole. My
personal lack of knowledge about the inside baseball does not change this
fact. And dismissing the macro view because of nuanced micro arguments comes
off as flippant, elitist, irresponsible, and incorrect in my opinion.

~~~
tptacek
I guess I'm suggesting that you haven't actually made a macro argument,
because you're not defining your terms. Could you please do that, and then we
can see if the concerns you're bringing up are credible? They might be!

~~~
bcg1
My argument is that it is theoretically possible that in a declining market
environment, the combined effect of HFT and other algorithmic traders (I
apologize for conflating and using crude terms, but my vocabulary is
admittedly imprecise and incomplete) could accelerate a market selloff and
overwhelm the normal mechanisms that have evolved over time.

For example, one worry I have is that algorithms may crowd out non-silicon
short sellers. As much as short sellers are demonized as "evil speculators" in
times of market stress, sometimes in a down market they are in fact the only
buyers available and actually slow down declines when they cover. I don't have
solid evidence that short sellers are crowded out by HFT... but I am trying to
provide an example of a scenario where the "macro" effects could transcend the
nuanced "micro" arguments about cost, efficiency, liquidity, etc. There are
numerous other plausible scenarios that fit this bill as well, and it is the
uncertainty around them that I am trying to point out.

Of course, none of these things have to do with IEX or a time delay... maybe
things like order stuffing or spoofing are related but even those things are
not what I'm talking about. Especially considering the dialog that has taken
place since Flash Boys was released, I feel that both industry and regulators
risk getting caught up in a cost/benefit analysis of the small issues while
ignoring potential systemic problems.

As an investor I don't really have a huge dog in this fight... I'm not
expecting any pension, and I don't own any managed funds. I generally use
fundamental analysis to do long term investing in broad sectors using ETFs and
a smattering of individual stocks. I manage my own money and so I will have no
one to blame but myself if things go wrong. And frankly, if I lose $0.0002 on
a trade by being frontrun in a dark pool it doesn't change my life, so for me
to argue for or against IEX is somewhat irrelevant. However as a taxpayer I am
concerned that public pension systems could very quickly find themselves
vastly underfunded in a short period of time, and as a human being I worry
about people who have worked their whole lives and just want to retire in
peace.

I think that my concerns are not entirely disconnected from what the general
public feels/understands about "modern markets", so while in most cases I
probably have no basis to refute your specific arguments, I suppose I take
exception to people with "macro" views such as mine being dismissed as
unsophisticated proles. Even if that is not what you were trying to do... Matt
Levine definitely comes off like that in his article.

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data_spy
Anyone think we will get something that is happening in AdTech? There are
several ad exchanges and there is 'header bidding' technology which let's you
hit all the exchanges at once for the bets price. Anyone know if this is
already occurring in stock exchanges?

~~~
jstanley
Yes, of course. Exploiting price differences between exchanges is arbitrage.
It's very easy to take advantage of (if nobody else is doing so) so is done
early on in any market.

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ComteDeLaFere
I've started reading through the 388 comment letters to IEX's application, and
this one in particular is basically a free lecture on the relevant issues by a
professor at the University of Chicago -

[https://www.sec.gov/comments/10-222/10222-371.pdf](https://www.sec.gov/comments/10-222/10222-371.pdf)

~~~
tptacek
The author is a critic of continuous limit-order book markets for what seems
to be a different reason: as the interval at which things trade constricts,
correlations can break down between things that should be priced 1:1.

His best example is ES and SPY, two different ways to trade the S&P500.

There's a straightforward high-frequency arbitrage strategy to deploy against
that problem: if ES or SPY is "mispriced", trade in offsetting amounts, in the
expectation that the correlation will be restored (as it must eventually be).
In Budish's view, this trading is a needless cost that doesn't improve price
discovery.

I'll just say, that's not IEX's argument against HFT.

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scottlocklin
I'm shocked; an actually good article about IEX which doesn't come from their
marketing department.

