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.
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?
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'.
"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."
Throwaway because it would certainly not be kosher for me to comment on this, but:
There are people who work at IEX who do not "drink the Kool Aid" and have been critical in private industry discussions about Katsuyama's statements.
Additionally, IEX actively solicits trading in their pool from HFT firms. For one, these same people understand that it is difficult to match the quality of other modern US equity markets without those participants. Moreover, it's hard to build appreciable market share (% of marketwide volume traded) without electronic trading, which is how their business makes money and grows in valuation.
I don't know enough about IEX to know whether the below is true. If IEX has this 'magic shoebox' mechanism in place, it might follow that they care about establishing a fair exchange in other ways too. There are hundreds of ways in which HFT firms profit from understanding the architecture of various exchanges. In some (many?) cases, HFT firms know more about the exchange architecture than the exchange does. The 'shoebox' addresses just one (mostly outdated) source of HFT competitive advantage.
Perhaps employees of IEX drink the koolaid because the exchange actively seeks to eliminate architectural areas of unfairness. The only thing publicized is the 'magic shoebox', but perhaps there are many more such features. Again, this is just conjecture.
"IEX is built from the ground up for those participants". This is not really correct. Why? because a huge percentage of IEX volume is HFT, just like on any other exchange or dark pool . Their whole solution is nothing but a marketing gimmick. All the major HFT firms trade on IEX just fine
Can you expand on how IEX's delay isn't preventing HFT from succeeding? I don't really understand enough about the financial markets to know what you mean.
every exchange takes some amount of time to match orders. IEX is no different. Let me ask you this way. Why would you expect IEX delay to prevent HFT from succeeding ?
Most exchanges take considerably less time and there are a lot of HFT strategies that require low latencies in order to cancel certain trades before they happen.
HFT requires low latency on their reactions, not the entire transaction. In IEX's situation, there are two major cases --
(1) A person decides to cross the spread on IEX first -- in this case, their order will be delayed by 350us (or whatever the shoebox delays), and no one in the world sees the result of their trade until the public data feed updates, in which case all participants are reacting off the same feed, same as any other US equity exchange.
(2) A person hits another exchange first, in which case HFT races to cancel their orders on IEX or cross the spread against another firm's orders on IEX -- yes, their action is delayed by 350us, but so is every other person, so you're otherwise racing to get into the message queue at IEX, and the artificial shoebox delay is irrelevant, since all market participants are equally delayed by it.
So while IEX's shoebox delays the latency on the result of an action, it doesn't make an appreciable difference in the typical HFT strategy. The primary difference is in (1), there is a higher chance that an unsophisticated large block trader (because a sophisticated one will have already set up the necessary delays to hit all exchanges simultaneously) will be able to hit market makers on both IEX and other exchanges before anyone has the time to react, thus being able to take large advantage of their own proprietary knowledge (their own order) some percentage of times more often. The only thing this results in a decrease in liquidity on IEX, but seeing as they're a dark pool/minor player anyways, the difference is negligible.
Yes, that makes sense, but the trade that is done on IEX is still not affected by HFT. So I understand how HFTs can still use IEX to make money, but I don't think that means the 350us delay is a marketing gimmick as vasilipupkin said.
It's a marketing gimmick insofar as it claims to somehow protect investors from HFT. As I said elsewhere, every exchange has latency of processing, theirs is 305micros higher. That doesn't appreciably change anything for anyone.
IEX claims that their delay means that large orders are able to be carried out without the price changing. If this is true, it would seem that IEX is not just a marketing gimmick and is in fact doing what they say they do.
If this is not true, I don't see why anyone would care about IEX at all, and why they would trade on it.
Yes, this claim is untrue. Large orders will move the market the way they always move the market and 350 micro delay won't change it one bit.
they offer lower fees than other exchanges - standard practice to steal away business from competitors. Traders will trade anywhere where there is liquidity.
I'm willing to believe you but do you have any source at all? Are you saying big block traders are staying on IEX because the fees are lower? That just doesn't make sense to me, the fee overhead is almost insignificant with big block trades. It's not a question of do the trades move the market, it's a question of can the trades fully execute before the market has moved. Obviously they move the market.
I just want to make sure I'm understanding you properly: you are saying that big block traders are using IEX because it has low fees, not because the IEX system is preventing the pricing from shifting during the order, correct?
yes. Also "big block traders using IEX" is a big statement. IEX has 1.5% of US equity volume and at least 20% of IEX volume are not big block traders. So, they aren't really using IEX that much. But to the extent they are using it, it's because the fees are lower and also it's because it's always nice to put pressure on other exchanges via additional competition for liquidity
If a participant places a large buy order into the IEX, this is going to affect the price of that asset, both at the IEX (obviously) and anywhere else it is listed, along with any correlated assets.
Now, the original participant will have bought its shares at the price it wanted at the IEX and be happy about it. However, market makers at other exchanges will not be aware of this upward price shock just yet. They will be blindly quoting sell offers at a price that had just been bought in bulk at the IEX. Whoever can receive the information out of the IEX 'magic shoebox' first and shoot that information over to the other exchanges will be able to make a profit. You can see that it doesn't matter how long the IEX delay is.
The original buyer will be the first to know of course, but they are unlikely to want to take on the risk of all available shares at that price at all exchanges. Thus, there will likely be some left for HFT to take.
Right...but the important function of IEX is that it protects the block order buyer or seller, and it seems to still be doing that, so it sounds like what they are doing is working.
I believe the discrepancy comes down to whether you count opposing counterparties indivdually or not. i.e. If 6 trades involve 6 non-HFT/non electronic market-maker (referred to as 'naturals') trading against 6 other naturals, and the other 4 involve naturals trading against resting HFT liquidity, you could either count that by counterparty that is HFT - (4 out of 20 counterparties) = 20%, or the number of trades that involve someone taking HFT liquidty - (4 out of 10 trades) = 40%.
So the 17.7% of HFT counterparties squares roughly with 30%+ HFT trades.
Second the call to get into the nitty gritty. I've read "Flash Boys" and consider myself reasonably aware of how HFT works but I'd like to know the technical aspects more in detail (understanding that some of that is, probably, proprietary). Any good resources?
Nitty gritty point: Volume is not equal to liquidity. Volume a low order values, provided by pinging, doesn't mean there's liquidity behind it that large block orders provide.
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.