BATS’s announcement of pricing issues that date back to 2008 puts the spotlight again on the technology implementation process, a broken window in the industry. Testing software in today’s environment produces inherent conflicts, as quality assurance departments are under increasing pressure to test ever-more complex systems in ever-less time. Even the tiniest change can require hundreds of tests to be rewritten and thousands to be re-run.
In this case, the BATS matching engine allowed the trade-through or execution of short sales that were not at the best price under certain circumstances. Long gone are the days when orders arrived on an order book one after the other and waited to be traded or canceled, now replaced by a constant vortex of activity as orders are constantly re-ordered and re-priced depending on their sensitivity to the market. Despite automated testing, a plethora of order types makes it virtually impossible to catch every known scenario. In addition, although one can come pretty close, it is also impossible to exactly replicate the production environment.
[Related: "Kill the Black Swan"]
Issues with order execution behavior usually surface for one of two reasons: a client complains, or it appears in the QA cycle. If the latter, problems usually surface when testing new functionality and the tests have changed. Common problems that have been present and unnoticed by clients are disturbing mainly due to the sheer number (in this case, 445,029 trades) and timeline, but their overall impact on the industry is small compared to the bigger and more immediate issues of 2012, such as the Knight rogue algorithm and the troubled Facebook IPO.
Comments | Post a Comment
47 Comments to "BATS’s Pricing Errors Fuel Complexity Debate":
lkovach
10 January 2013
Miranda, it seems Joe Ratterman might disagree with you: Bats CEO Says Software Problems a Symptom of Too-Complex Market (Bloomberg)
Comments (31)
mmizen
11 January 2013
Thanks Les. Few would dispute the market structure is highly complex today. But exchanges establish their own order types to better compete.
Comments (41)
Anonymous
11 January 2013
There are few solutions: 1. Introduce a small transaction tax (say .01 percent) that no real investor would mind but it will remove the trading-by-the nano-second crowd. 2. Charge a fee if the cancellation ratio is over a certain percentage (say 95%). 3. Eliminate the bogus order types that were created to favor HFTs that increasingly butter the bread of many exchanges at the expense of real investors
barney
11 January 2013
shouldn't we distinguish between problems within the exchanges and the fragmentation across venues?
Comments (16)
John Harris
11 January 2013
In order to protect NYSE and other politically-favored players from the disruptive threat of the Internet and new, technologically-savvy players, the SEC promulgated the fallacious notion of "best price" and then a "trade-through" rule. The stated reason for the trade-through rule was to ensure that investors get the (fallacious) "best price," but the real reason was to ensure that the NYSE and its fellow incumbents remained in the game.
So, we can debate QA cycles and complexity and blah blah blah until we're blue in the face, but the truth of the matter is that we have a market structure imposed bureaucratic fiat for anti-competitive reasons, and investors suffer far more from that than they do from some inconsequential matching errors at BATS.
mmizen
11 January 2013
Yes exactly. The SEC doesn’t dictate exchanges need to put forward complex order types – exchanges take months, sometimes years working to get rule filings approved. Responsibility for deployment lies with the exchanges as SROs (or brokers implementing the Market Access Rule). If the rules around deployment need to be tougher or there needs to be greater monitoring - although i don't subscribe to the regulator taking responsibility for signing off on algos, for example - , the trade off is time and $.
Comments (41)
John Harris
11 January 2013
The complex order types are a function of the absurd market structure the SEC imposed. Coordination of prices among exchanges should be effected by order routers and arbitrageurs. Period.
stevewunsch
11 January 2013
John Harris has it right, but does not appear yet to accept the implication of his analysis. The SEC and its National Market System are the cause of all of these problems, which will continue to get worse in the future until the NMS and the SEC go away. The foolish and ultimately socialist notion that we can eliminate the difference between consumers and suppliers of liquidity by putting them on a level playing field via best-price routing requirements underlies all the high frequency confusion, aberrations and errors that keep getting worse. There is no hope for a let-up in the deterioration of our markets until the SEC disappears from the scene.
Comments (47)
John Harris
11 January 2013
You must have me confused with someone else, Steve. I have long advocated abolition of the SEC and the "National Market System" and opposed government regulation of our markets. In this forum alone, see these essays:
"The Ultimate Regulatory Enforcement Tool is a Gun" (http://tabbforum.com/opinions/the-ultimate-regulatory-enforcement-tool-is-a-gun)
"Further to Dennis Dick's 'Recipe for a Toxic Market:' Harris Answers Hubert-Felix (http://tabbforum.com/opinions/further-to-dennis-dick's-%22recipe-for-a-toxic-market-%22-harris-answers-hubert-felix-1)
"Large Trader Reporting System is Insulting, Unconstitutional" (http://tabbforum.com/opinions/large-trader-reporting-system-is-insulting-unconstitutional)
In numerous comments I have remarked on regulatory capture, the use of regulation by incumbents to bludgeon smaller competitors and suppress competition, and the follies of not just the SEC but also FINRA.
Anonymous
11 January 2013
Mr. Wunsch's sarcasm nothwithstanding, Mr. Harris might have been a NYSE specialist of old, one that would disadvantage every retail (and, perhaps, institutional) order for a disorderly market. Cryptic order types advantaging one group at the expense of another is the root of all evil. The lawyers at the SEC signing off on exchange order types are simply clueless.
John Harris
11 January 2013
Anonymous:
"[B]elief in the powers of regulation is religious in nature. Evidence suggests that regulation fails at its stated purpose of protecting the innocent from the rapacious. At best, regulation lulls the innocent into a false sense of security and causes them to feel relieved of the duty of due diligence."
-- "The Religion of Regulation" (http://john.harris.io/2008/12/13/the-religion-of-regulation/)
Anonymous
11 January 2013
John Harris:
Regulation, police, firemen, EMTs, all have a purpose in society, but they, not being God, are fallible. Perhaps you would like to live in a town without police and other emergency personnel. Maybe a Jonestown or a Harristown. The rest of us prefer some sense of order.
bower
11 January 2013
Comments (1)
Anonymous
11 January 2013
For clarification, that's a different "anonymous." Taxes and fees are the problem. Not the solution.
John Harris
11 January 2013
All people are fallible, anonymous. In a free society, if I do not like one fallible producer of a service, I am free to choose another. This healthy competition motivates producers to be as infallible as possible. Under your system of forced government monopolies, I am forced to live with the fallible service provider and he has no incentive to improve.
Anonymous
11 January 2013
Furthermore, the "nano-second crowd" has every right to trade and they should not be disadvantaged relative to any other group. A functioning market needs every group to participate, and regulators to maintain order, as we cannot rely on fear and greed to do so.
Anonymous
11 January 2013
Is there really a need for innovation, beyond ensuring a functional, stable, efficient market. Defenders of the principle of competition between exchanges will say there is; from a point on though, all innovation starts eating on the very foundations of what a market - any market! - should be.
John Harris
11 January 2013
A "functioning market" is one in which buyers and sellers meet and transact on terms of their choosing, of their own free will and volition. There is no innocent reason for introducing force into that equation, which is what government regulation does. And it is incredibly naive to believe that government regulation can or ever does serve a purely benign, humanitarian purpose. It is, always has been, and always will be a political force wielded to advantage some at the expense of others.
Anonymous
11 January 2013
What are you suggesting instead, John? A market place with no rules, no accountability and no responsibility?
John Harris
11 January 2013
I am suggesting that people mind their own business and leave others free to mind theirs; that free competition is the only "regulator" markets need and mankind's greatest benefactor; and that common laws against theft, fraud, trespass, and torts are the sufficient for dealing with miscreants.
And while we're at it, let's put issuers back in control of the secondary markets for their securities, if there are to be secondary markets at all for their securities.
stevewunsch
11 January 2013
I stand corrected, John. Actually, I was thinking you might be in that fully free market camp, but couldn't tell for sure from your early posts in this thread. As to the Anonymous who thought I was being sarcastic, I recognize how Quixotic it sounds to say that market structure improvement depends on such an unlikely development as getting rid of the SEC, but that's the way it is. Our markets were already the largest, most liquid, most robust capital-raising engines in the world before the SEC arrived on the scene to "improve" them. Government is the source of disorder, not order, as it seeks to replace efficient networks that formed under free competition with structures designed by Government. Government can only disrupt order, never create it. That is why our markets are falling apart structurally, as the NMS Frankenstein goes more and more berserk.
Comments (47)
John Harris
11 January 2013
The late Walter Werner from Columbia University wrote, with Steven T. Smith, Wall Street, a terrific history of the development of capital markets in the United States, focusing particularly on the period 1790 - 1840. The book was published by Columbia University Press after Professor Werner's death and may be out of print, but new and used copies can still be found via Barnes & Noble or Amazon. To your point, Steve, somehow we were able to develop highly-functional securities markets without the assistance of the SEC, and had the canals, railroads, and factories to prove it.
I always learn a lot from your essays on market structure - thank you for them.
Anonymous
14 January 2013
IMO, less regulation of the secondary equities market would not lead to wide-spread chaos but would actually improve the situation drastically. Rules 610-612 of NMS should be eliminated since they directly increase complexities which obfuscate micro-structure and increase participant's cost of infrastructure (both hardware and software). Compliance with 610 and 611 has led to the proliferation of order types and results in Exchange order entry systems which contribute to disparate trading experiences. Unsophisticated traders are more likely to be exposed to adverse selection due to their willingness to allow latent Exchange handled outbound routing and/or poor queue position caused by methods designed to prevent locked market and trade-through rule violations. Rule 612 and MPVs in general are only necessary if trade-throughs are prohibited since smaller tick sizes lead to suboptimal aggregated display sizes. If there was no trade-through rule, you might find some Exchanges offer smaller tick sizes to the advantage of retail, while others offer larger ones to enhance block liquidity provision. If order protection and execution quality are concerns, consider that competition would drive brokers to optimize routing decisions in the best interest of their customers. Technological innovation has led to wider access to information than ever before so we shouldn’t try to compare the past to the present.
lkovach
14 January 2013
Anonymous: Haim Bodek makes similar arguments in his series on TabbFORUM about order types and the HFT advantage: http://tabbforum.com/opinions/locked-markets-priority-and-why-hfts-have-an-advantage-part-i
Comments (31)
Anonymous
14 January 2013
Haim and I differ on one significant point: I do not believe that order types and/or modifiers are nefarious. Anyone who takes the time to read an Exchange's rule book and specifications (which are both freely available on the web for all exchanges) would know how to optimize their experience; thus, the notion that fair access has been violated is wrong. I just think certain order types AND handling mechanisms are only necessary due to the aforementioned rules. If competition was allowed to truly prevail, participants should be allowed to continue using orders with complicated instructions if they desired. If exchanges and their customers think there is value then more power to them. However, they shouldn't be forced to subscribe to the idea that price is the only qualification of best-ex. For instance, a 50 bid should be accepted and displayed despite a 49 offer away if there is sufficient evidence of a better overall execution...the onus is on the investor and their broker to make that decision.
Anonymous
15 January 2013
John Harris: "A "functioning market" is one in which buyers and sellers meet and transact on terms of their choosing, of their own free will and volition"
All this be true, a market is not an abstract notion from MBA course books; it still needs organizing and rules so that to guarantee best and equal servicing of all participants (which btw are more like members than customers imo, hence the question mark I always tend to place next to the idea of "privatized markets")
"And it is incredibly naive to believe that government regulation can or ever does serve a purely benign, humanitarian purpose"
Some of us should still be allowed to keep hope that will sometime be truel! Yours is a view bordering cynicism wr the democratic process. That aside government/regulators can and should set rules when markets are obviously disfunctional, and the case has many times been made on this forum about order types, time splitting, HFT and so on - and btw algos should definitely be approved before being allowed crashing the market as we've seen in the recent past
Anonymous
15 January 2013
So many aninimi (or ananymouses), hard to keep track of all of them/us. Perhaps TABB Group can allow us to append a numerical suffix to differentiate amongst us?
John Harris
15 January 2013
If you are suggesting, Anonymous, that a functioning market as I have defined it is merely an abstract notion, it isn't. Markets operating on exactly that definition exist all over the world at this very moment. And I suspect that you missed that the operative term within the context of this discussion is "functioning." Once government regulators intervene, markets cease functioning as such and become something else.
Yes, generally, someone organizes even primitive markets, e.g., yard sales. And even primitive markets today operate on the basis of common law as well as other social norms or customs. If I am at your yard market and hand you the five dollars you have demanded for your old toaster, but you then refuse to hand over the toaster, you have committed theft (a violation of common law). Similarly, if we negotiate a price for that old surfboard of yours, but after we say "done" you change your mind, you have violated a social norm.
But you go too far when you state that the purpose of "organizing and rules" must be "to guarantee best and equal servicing of all participants." That isn't true as a general matter. Markets segment their customers and treat them differently all the time. So what? Who cares? What business is that of anyone's other than those who organize and participate in the market (or choose not to participate)? Even your phrasing admits of no reasonable or measurable standard. What do you mean by "guarantee?" What do you mean by "equal servicing?" What do you mean by "all participants?"
You acknowledge as "true" that a "functioning market is one in which buyers and sellers meet and transact on terms of their choosing, of their own free will and volition." I wonder why you are not content to leave it at that? Why do you feel the need to intervene, or to have someone else intervene, in social arrangements that other human being make of their own free will and volition? Why are you not content to mind your own business and leave them alone to mind theirs?
As for your desire to "be allowed to keep hope" that "government regulation can or ever does serve a purely benign, humanitarian purpose," I am happy to allow you to hope for whatever you please. I would not think of denying you or anyone else their hopes. But I would ask for the same consideration in return. I'll leave you be - you leave me be. I'll keep my nose out of your business - you keep your nose out of mine. I'll let you associate and trade with whom you please - you let me associate and trade with whom I please. Even if you think my yard sale is dysfunctional according to some standard of yours, leave me and my patrons to our dysfunction. Heck, set up your own yard sale and show us a better way. But otherwise leave us alone. We are not your concern. Mind your own business, and we'll mind ours.
stevewunsch
15 January 2013
At the risk of diluting the impact of John's absolutely correct last post with a clarification, it is worth noting that it is not just simple market structures like those for yard sales that are best left alone. Natural network formation, i.e., unmolested by government, is capable of producing the most massive, complex and powerful elements of our economic infrastructure. The pre-NMS stock market, replete with NYSE's auction market and Nasdaq'a dealer market, and essential monopolies for the trading of each stock via market division arrangements among the listing monopolies of the NYSE, the NASD and the American Stock Exchange, was one of the best examples any society could boast that such organization and the rules to enforce order can and do arise on their own. It is not just in spite of but because of the SEC's effort to disrupt and dismantle the rules and customs by which those networks functioned, that we have such disorder, dysfunction and chaos today. And it is hoping against hope to imagine that giving regulators more power to disrupt the natural order will produce anything but more disorder.
Comments (47)
Anonymous
16 January 2013
John Harris :
"If you are suggesting, Anonymous, that a functioning market as I have defined it is merely an abstract notion, it isn't." Point taken, it seemed to me your definition implied more or less the absence of all rules, common law excepted.
"Once government regulators intervene, markets cease functioning as such and become something else."
Shall we return to the debates around the subprime crisis, when even Alan Greenspan, interviewed after leaving his Fed job, agreed his view of self-regulating markets was mistaken?
"Markets segment their customers and treat them differently " This is true since markets have been privatized, and my view, as I already stated, is that allowing and pushing that has been a mistake and eventually works contrary to the interest of not only trading entities, but the financing of the economy - that is, the very reason of existence of financial markets (I hope we can agree on that, at least?). In any case, by guarantee I mean not having incidents such as BATS recent one, or the one crashing NYSE last year. By equal I mean setting a limit to the time slicing so that 'normal' traders get access to the markets under the same conditions.
Why am I not content with your primary definition ? Because of the problems we saw ever since the subprime crisis, but also as a matter of principle. Organized markets appeared because yard markets like the one you described were by far insufficient in terms of size, depth, transaction security etc etc. As such, it would be a contraditio in termine to allow organized markets to get as dysfunctional as your yard market could be.
abekohen
16 January 2013
Steve,
Are you really pining for the days when NASDAQ markets were 1/4 - 1/2 by collusion and you tried to bid 3/8? Puhleeze! Or when NYSE specialists could steal 1/8s, 1/4s, and more by putting up a buddy trade in front of a Super-DOT order? Hey, $2 broker, look it's flashing a buy, you sure you don't want to pay 1/2 and then sell it back for 7/8? Why do you think a NYSE "seat" was worth $2 million? Now the thieves - er -specialists are gone, the spreads have narrowed considerably, alternative venues abound - ALL thanks to regulation and enforcement. Did the SEC f*&^k up on Madoff? Sure. But they do some things right.
Comments (46)
John Harris
16 January 2013
I am happy to return to the debates around the subprime crisis, Anonymous, and especially to the outrageous claim that lack of regulation or "self regulation" caused the crisis. It isn't even necessary to debate the conclusion of this claim when the premise itself is false. These institutions were intensively- and continuously-regulated by multiple government and quasi-government agencies at all times relevant to the crisis. The only people who could claim otherwise are either naive or engaged in a blame-shifting exercise. But, that said, I do not blame regulators for the subprime crisis. They contributed to it by creating a false sense of security in its victims. They were either too incompetent or conflicted to prevent or detect the fraud and other criminal activities that did cause the crisis. But the preponderance of blame for the crisis lies with the boards of directors, executives, originators, traders, risk managers, compliance officers, accountants, and auditors of the involved firms, as well as their enablers at the ratings agencies, clearinghouses, and central banks. Ultimately, the crisis was and remains a massive, net-capital-accounting fraud. Fraudulent practices such as "Repo 105" were common at large, primary dealers for at least fifteen years prior to 2007, and all of us who worked in balance-sheet-intensive areas of these banks know that. The shorts figured out that these banks were a house of cards and would have driven them into the oblivion they justly deserved had the government not stepped in to save them. And thus the market still hasn't cleared and isn't allowed to function.
You object to the rules by which our exchanges operate and that is your right. I will even join you in disliking many of the practices of these exchanges. But at this point in our discussion, what I cannot understand is why you place your faith in even more regulation as a cure for these ills. Seeing the patient grow more ill after leech therapy, you order up more leeches! Perhaps it is time for you to consider that your science may be wrong, that more of the same will not solve the problem.
I have said that the trade-through rule was an anti-competitive device that sought to protect the market positions and relevance of incumbent exchanges. Steve Wunsch, Haim Bodek, and others have explained in rich detail how machinations around this and other market-structure-shaping dictates have warped our markets and produced the very ills you decry. Frankly, I don't recall anyone even launching a defense of these rules or disagreeing materially with the explanations of Wunsch and Bodek. What I see instead are demands for more rules! When, pray tell, will we have enough rules?
Might it just be there is another way, a natural way, to "regulate" markets? Perhaps even competition? Perhaps allowing exchanges and firms that don't meet the demands of consumers to actually fail? Perhaps if we're going to have common laws proscribing fraud and theft, we might actually prosecute people when they commit these acts on a massive scale. And perhaps, when entrepreneurs see, or at least think they see, incumbents engaging in stupid practices and failing to satisfy their customers, they should be free to offer what they deem to be a better way on the open market and give consumers a real choice.
I am grateful for Steve Wunsch's clarification of my previous. We human beings are able to form networks naturally, on a massive scale, that meet our needs in ways no one could predict. Left free, these networks are both resilient and adaptive. Natural monopolies can be and are benefactors of mankind, but only if they are natural and subject to failure if and when a better way emerges. Government regulation is unnatural. It protects incumbents from competition and impedes natural network formation. Government regulation is arrogant and sclerotic. Demands for even more of it in the face of overwhelming evidence that government regulation is counterproductive are not just short-sighted but self-defeating.
abekohen
16 January 2013
John:
The '33 and '34 Acts were not created in a vacuum. They were created after lots of people had been f**ked out of their life savings by unscrupulous operators. Perhaps in a utopian market system competition cures all, but not in the real world which is motivated by fear and greed. So a little fear is needed to keep things in line. One can argue over how much regulation, how much police, how much fire protection. Perfect, no system ever is, but the last two decades have seen what happens with lax oversight and lax regulation and when greed overcomes all fear.
Comments (46)
Anonymous
16 January 2013
The '33, '34 and '40 Act for that matter, ultimately serve the purpose of placing law around investment fraud and manipulation. I don't think anyone is arguing fraund and manipulation shouldn't be regulated. The crux of this debate is whether or not law should dictate how essentially consumers purchase and dealers sell goods. If you consider securities equivalent to goods, Reg ATS and Reg NMS are a little frightening. Could you imagine a world in which the government mandated shoe stores to either match competitors prices or act as an agent to buy shoes from the competitor when they couldn't? This is essentially what the trade-through rule dictates and just like the logistical (not to mention anti-capitalist) nightmare it would create for shoe retailers, it has done so for the securities industry.
abekohen
16 January 2013
Shoes are not fungible assets. Shoes are tangible assets. You don't want every buyer of JNJ to have to touch and feel and try on 100 shares for size.
Comments (46)
John Harris
16 January 2013
No law is created in a vacuum, Mr. Kohen. Just because laws are created doesn't make them necessary, just, or sensible. The Fugitive Slave Act was created after lots of people lost their "property" in schemes aided and abetted by others. Was that a benign act? Were politicians more wise or moral in 1933-34 than they were in 1850? Are they wiser or more moral today?
Weren't fraud and theft against the law in 1932? Didn't we have a functioning civil court system for redress of torts in 1932? Can you explain how these "unscrupulous operators" slipped past common laws with which no one disagrees? Why should we socialize the costs of due diligence? Why should people who have nothing to do with the stock market be forced to pay for its operation?
Do you believe all laws are just as they seem? Do you believe there is ever a gap between the stated and real purposes of a Congressional act?
Can you justify today the law that prohibits ordinary people from meeting and transacting directly on an exchange, without the mandated services of a middleman?
I am happy to have you or anyone else follow whatever rules and regulations you prefer. Why would you deny me the same freedom?
Anonymous
16 January 2013
the principles of arbitrage would ensure a reasonable amount of price parity despite NO trade-through rule. the difference between now and the past is that technology has significantly lowered the barriers to entry and made markets more efficient in that regard. however, unecessary regulations have caused a logistical nightmares which ulitimately increase the industries costs and disparity of the haves and have-nots. using your example: in a world with no NMS, savy individuals might create businesses around touching and feeling and trying on 100 shares of JNJ for size on behalf of the end buyer...we'd call them brokers...what a wonderful idea ;-)
Anonymous
16 January 2013
"unecessary regulations have caused a logistical nightmares which ulitimately increase the industries costs"
As pointed out on another thread, traded volumes should be evaluated wr to, say, year 2007, let alone 2002 : exponentially exploding (for lack of a better pleonasm) volumes (and profits) definitely don't seem to indicate increasing costs were a huge problem for the industry. But hey, let us keep comparing to 2011 and cry our eyes out on our own convulsing shoulders.
Anonymous
16 January 2013
Direct Edges Discloses Order-Handling Discrepancies
http://www.securitiestechnologymonitor.com/news/direct-edge-discloses-order-handling-discrepancies-31536-1.html?ET=securitiesindustry:e4210:180379a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=STM_BNA_08302010_011613
John Harris
16 January 2013
This news out of Direct Edge, coming on the heels of similar news out of BATS, is quite interesting, especially as to its timing. As Les Kovach noted above, Haim Bodek wrote a four-part series in TabbForum on certain HFT trading practices. TabbForum published Bodek's articles in October and November of 2012. Bodek suggested that HFTs may be taking advantage of certain undocumented features in exchange matching engines, as well as anomalies in price feeds, to game the order-display, -handling and -matching rules of these exchanges. I inferred from Bodek's articles that exchanges may be aware of and even enabling these practices. Bodek also suggested that the most profitable of these gaming opportunities were available to only a small subset of the HFT firms (to include, I trust, the systematic trading desks at large broker-dealers).
Did Bodek's disclosures trigger a scramble at BATS and Direct Edge? Did he in effect "out" them and bring about the disclosures they are making now?Are other exchanges now hustling to cover themselves with similar disclosures? And were these admitted rule violations really "bugs" or actually features of their software?
Les, it would be great if you could ask Mr. Bodek to comment on these latest developments. I think a lot of readers are curious as to his thoughts on the matter.
lkovach
16 January 2013
I believe Haim was arguing that brokers need to help their clients understand these order types as much as he was saying that they hold the potential to be unfair, but I do not want to speak for him. I have already reached out for his feedback, however -- hopefully he'll be able to comment here shortly. Stay tuned.
Comments (31)
hbodek
17 January 2013
I see the BATS and Direct Edge announcements to be a result of the regulatory scrutiny on order matching engine practices that took place over the last year and a half and which resulted in significant pressure on exchanges to prove they were matching their rules (which they weren't). The "clean-up" has been a work in progress for quite a while as far as I can tell. The Sep-Nov 2012 press coverage just brought the public into the know. If you look back, the first news item on order matching engine regulatory scrutiny actually came out in Feb 2012. News items came out nearly every month after that. It took a very long time for the news to be absorbed by the industry, which I found perplexing. The industry just wouldn't touch it until Larry and Les demonstrated the leadership to bring the order type issue into the center of the market structure discussion on the Tabb Forum.
I have a short chapter that discusses some of the progress made in 2012 in my new e-book The Problem of HFT available on Amazon. I was planning to talk to Les today about putting an excerpt up on Tabb Forum, but we missed each other.
And yes Les, your understanding is correct. There is no other option for brokers but to use the HFT-oriented order types correctly. The issues that are being addressed have little to do with the publicly available documents on order types. The issues I focus on are the egregious asymmetries that built up the monster HFT run-rates, but those features either have already been eliminated or presumably will be eliminated this year. The likely end point I anticipate is that brokers are going to have to execute in the same manner than small HFTs currently do right now, which can be done as Anonymous says with the existing documentation. It is extremely unlikely that the order types go away any time soon. I discuss that conclusion extensively in the new ebook I mentioned.
Haim
Comments (20)
John Harris
17 January 2013
Thank you, Haim.
abekohen
17 January 2013
Haim,
Clearly you put in an amazing amount of time and effort analyzing HFT and all its ramifications. How do you know that the "clean-up" was a result of regulatory scrutiny (John Harris, are you OK with regulatory scrutiny?) as opposed to testing price-sliding as part of the Limit Up/Limit Down implementation which exposed the earlier price-sliding problem, at least at BATS?
Abe Kohen
Comments (46)
John Harris
17 January 2013
Abe, if the federal government is going to forcibly replace competition as a regulating force with a monopoly of its own creation, and then arrogate to itself the power to perform certain services the market needs and would otherwise provide, then sure, under those circumstances, I am "OK with regulatory scrutiny." But as you know, I would repeal the '33 and '34 Acts and all other laws enabling or mandating federal regulation or control of markets, so please don't take my acquiescence on this point as an endorsement of government regulation. It's not.
Anonymous
17 January 2013
FIA European Principal Traders Association said it supports the overall direction and objectives of Germany’s proposed regulation on high-frequency trading. “We generally endorse the proposal and believe a reasonable regulation of high-frequency trading to be appropriate, such as requirements on minimum tick sizes, enhanced transparency and order-to- trade ratios based on the respective class of instruments,” Spanbroek said.
http://www.mondovisione.com/media-and-resources/news/fia-epta-broadly-welcomes-proposed-german-hft-legislation/
lkovach
21 January 2013
Here's an excerpt from Haim's book: http://tabbforum.com/opinions/hft-checkmate-the-alpha-in-an-order-type
Comments (31)