The Citadel letter mentioned in the article (http://www.sec.gov/comments/10-222/10222-16.pdf) is a very good read. I work in the industry and they hit all the main problems with IEX's approach.
> This damage to market quality would be further magnified by the “fast pass” that IEX proposes to give its affiliated routing broker-dealer (the “IEX Router”) and its pegged order types. It is ironic that IEX—a company supposedly founded to protect investors from various types of latency arbitrage—now proposes to offer pegged orders and IEX Router services that can and will be used by sophisticated trading firms to arbitrage the latency that IEX itself would create.
Could you explain this in more general terms? Especially,
1) Does IEX propose to exempt some traders from the delay? Isn't that obviously worse than no delay at all?
2) What are "pegged orders"?
Also, if you don't mind being spokesperson for an entire industry, is there a sense that when we are debating 350 microseconds, things are a bit absurd?
I haven't read the documentation, but I can respond to your questions given what you quoted.
1) It seems that way. Presumably, they will require affiliates to follow stricter rules. Even so, you would expect that these affiliates would try their hardest to take advantage of their speed advantage.
2) Pegged orders are essentially orders that the exchange manages for you. For example, if you peg an order at the inside bid, your order will follow the market as it moves around. Essentially, these orders will react with close to zero latency since the exchange itself is modifying them. It's unclear how these orders will be used to game the market, since their logic is so simple and predefined by the exchange.
In terms of time frame, it's just the evolution of technology. For example, processors are clocked in nanoseconds. When your limiting reagent is how quickly you can update based on changes in the world, you need lower latencies. That's one of the aspects of the system that IEX tries to solve, by adding a giant delay to everyone's orders, so that the jitter swallows any small advantage.
One of the concerns of changing the rules, however, is that once smart people start using the system, they will eventually find some new way to game it, landing us not far from where we started.
Pegged orders are an order type where you tell the exchange "keep me at the best bid/offer" or even sometimes "keep me n levels off the best bid/offer". Its basically an order that allows the exchange itself to change your price for you so that you don't incur messaging latency and inconsistency.
I just finished reading Flash Boys by Michael Lewis, it was an incredibly enlightening read. To answer your questions:
1) I think it's 350mcs across the board except in the case of firms which conduct suspect activity (canceling orders frequently for example). Adding the delay institutes a level playing field across anyone trading on the exchange. The basis of HFT is leveraging faster connection speeds to gain insight into other's trading strategies and exploiting those strategies, all before the other firm's trade reach the exchange. This is a HIGHLY simplistic explanation dealing with one form of arbitrage and given for brevity on the subject.
2) EDIT: the other guy explained this better!
To your point about 350mcs being absurd to argue over, HFT firms manage regular trading speeds in NANOSECONDS. Look at 350mcs in those terms (350,000 nanoseconds) and it's not such a small number anymore.
If you thought Flash Boys was enlightening then you didn't read carefully. He makes shit up.
Take the one example of a trader that claims the market jumps just by he entering a symbol and quantity- not submitting the order. That's huge! It means espionage in a major trader's office! But since Lewis knows it's just bullshit coincidence, he just says "oooo spooky HFTs".
Flash Boys: Not So Fast is a far better book. And even better, it's actually acurate.
Lewis's book is just an ad for IEX, hoping to scare ignorant people into worrying about perfectly fine stuff. The star, Brad, in his first scene, is shocked, just shocked, that his 50,000 order could cause price impact.
(Think: the customer paid 5 cents (2500$) to get Brad to sneakily sell the shares - obviously price impact is to be expected.)
There are plenty of cross markets, and nothing stops anyone from running a 5-second auction (with simple pro rata or complicated rules like POSIT). But IEXs investors just think coiling 38mi of fiber is neater. At least it makes a cool display for data center visits.)
> Flash Boys: Not So Fast is a far better book. And even better, it's actually accurate.
I just read it on a recommendation from HN. Entertained me on a longhaul flight. Boy, does the author take apart Flash Boys. Alas, approximately no one will ever read this deconstruction.
IEX only adds 350 usec in delay. I'd also add that if you just read Flash Boys you probably got a very incorrect view of what high frequency trading is all about and particular what cross exchange market making is about.
"Kovac then writes, “In other words, this research, cited by Lewis himself near the conclusion of his book, contradicts everything he has said about front-running in the prior two hundred pages.” Kovac suggests this is some kind of “Aha!” moment. See, he seems to say, there’s no front-running and Lewis’s own sources say so.
Your guess is as good as mine on this, but Kovac seems to be the one who apparently didn’t read the research. Go to the next paragraph in Clark-Joseph’s paper: “[T]he private information about price-impact generated by an HFT’s small aggressive orders enables that HFT to trade ahead of predictable demand [that is, front-run demand] at only those times when it is profitable to do so (i.e., when price-impact is large).”"
To be fair, Flash Boys is a book where the main beneficiaries have a vested interest in portraying HFT and especially cross market arbitrage as predatory.
Further, themis trading has a vested interest in portraying HFT and especially cross exchange market making as predatory. Both groups work for market participants that want to move large amounts of shares without impacting the price. That is they want to subvert supply and demand. Their particular quote does a disservice to every one because it equates pricing demand into the market as front-running, which is ludicrous.
Full disclosure, I have worked in the HFT industry (though I don't now). Regardless of whether HFT is predatory or not, Flash Boys inaccurately portrays how the technical details of exchanges work. I do not, and have met no person who is aware of the technical details of the markets who finds it credible.
Granted, Flash Boys is positive publicity for Brad Katsuyama and IEX and much of what Brad and his team uncover is through hypothesizing, testing, and inference, no one in HFT comes out to confirm if these ideas are correct or not.
While the technical details of the system might be up for debate, Flash Boys paints a broader picture of a broken global financial marketplace, run by institutions struggling to keep up with new technology and unable to craft good regulatory policy. A system gamed by investment firms (or more accurately, investment intermediaries like HFTs) whose advantage comes from exploiting these poor regulations and new technologies, creating market imbalances that affect the entire marketplace and generate incredible profits at the detriment of the investors to whom these firms have a fiduciary responsibility to.
The broader picture of a screwed up financial system, how it got this way, and who it serves was my biggest take away from Flash Boys.
Could you explain this in more general terms? Especially,
1) Does IEX propose to exempt some traders from the delay? Isn't that obviously worse than no delay at all?
2) What are "pegged orders"?
Also, if you don't mind being spokesperson for an entire industry, is there a sense that when we are debating 350 microseconds, things are a bit absurd?