The original plan for IEX sounds like a wonderful extortion racket. By law, you cannot buy or sell stock on someone else's behalf unless you check with all major US stock exchanges first to verify that you are getting your client the best price. IEX intentionally, massively delays answering back unless you pay them buckets of money. Thus, unless you pay IEX buckets of money, you are at a huge disadvantage on every stock market, not just IEX. Quite a racket.
Has anything changed with either the laws or IEX's plan since then?
Update: IEX did indeed change their proposal to remove the favored order routing. Which still affects trades in other exchanges, and still affects negatively effects traders on all markets, but at least its "fair" now.
you cannot buy or sell stock on someone else's behalf unless you check with all major US stock exchanges first to verify that you are getting your client the best price
It's not just trading on behalf of a client. Even if you're trading directly for yourself, you're still legally obligated not to "trade-through" a displayed price. The idea is to protect the person who placed the displayed order, not yourself or your client.
IEX intentionally, massively delays answering back unless you pay them buckets of money
You can't pay them to avoid the delay. They delay all outgoing direct-to-trader information and all incoming orders or cancels.
The difference between what IEX does and just placing your stock exchange 38 miles from everyone else's (350us at light speed in fiber) is that while they delay incoming orders and outgoing data, IEX itself listens to data coming in from other exchanges with no delay, and uses that 350us look into the future to re-price orders before anyone else can interact with them.
If someone is publically offering to buy a stock for $10.00 on Exchange A (i.e. they've placed displayed limit order), then it's illegal for you to sell that stock to someone else for $9.99 on Exchange B. If that trade did happen, the order on Exchange A is said to have been "traded through". The rule protects limit orders which have the best price available from missing out on a trade just because they were sent to the wrong exchange.
The idea is to protect the person who placed the displayed order, not yourself or your client.
I'm pretty sure that's wrong. I've never heard NMS/rule 611/etc described in those terms, and logically, it makes no sense. The point of the rule is to try and stop people eg, buying at price X when the NBBO is < X, full stop.
Here's my evidence that Rule 611 is more about protecting resting limit orders than marketable orders:
1. It's called the "Order Protection Rule".
2. It defines "protected quotations" and makes it illegal to trade through them.
3. It doesn't just apply to agency trading (where you could argue that it's meant to protect the client); it's also applicable to principal trades.
4. There's no allowance for trading off fees or latency or probability of getting a fill against price. For example, you can't choose buy immediately at $10.01 on Nasdaq instead of waiting for a 30ms round trip from Chicago at $10.00, because it's the quote on Chicago that's being protected, not you.
5. If you send an ISO order to an exchange (which basically says "don't route this elsewhere even if you see a better quote"), and it turns out that you traded through a quote somewhere, the SEC will fine you, because they're protecting that other quote, not your marketable order.
6. This quote from the SEC: "Many commenters on
the proposals ... strongly supported the need for enhanced protection of limit orders against trade-throughs. They emphasized that limit orders are the building blocks of public price discovery and efficient markets. ... by enhancing protection of displayed prices, would encourage greater use of
limit orders and contribute to increased market liquidity and depth. The Commission agrees that
strengthened protection of displayed limit orders would help reward market participants for
displaying their trading interest and thereby promote fairer and more vigorous competition
among orders seeking to supply liquidity." [1]
You might be surprised (when talking about the U.S equities exchanges at least): http://anova-tech.com/wp-content/uploads/2014/09/market-data.... The LoS distances in NY are on the order of 5-30mi and the lowest latency links are over microwave and laser.
By law, you cannot buy or sell stock on someone else's behalf unless you check with all major US stock exchanges first to verify that you are getting your client the best price.
The side-effects of this law and because of it not being able to achieve a 'fair' price was why IEX was created.
Edit: This is neither a pro nor anti comment. It is a factual comment, of the motivation to create IEX.
Comments
The original plan for IEX sounds like a wonderful extortion racket. By law, you cannot buy or sell stock on someone else's behalf unless you check with all major US stock exchanges first to verify that you are getting your client the best price. IEX intentionally, massively delays answering back unless you pay them buckets of money. Thus, unless you pay IEX buckets of money, you are at a huge disadvantage on every stock market, not just IEX. Quite a racket.
Has anything changed with either the laws or IEX's plan since then?
Update: IEX did indeed change their proposal to remove the favored order routing. Which still affects trades in other exchanges, and still affects negatively effects traders on all markets, but at least its "fair" now.
It's not just trading on behalf of a client. Even if you're trading directly for yourself, you're still legally obligated not to "trade-through" a displayed price. The idea is to protect the person who placed the displayed order, not yourself or your client.
You can't pay them to avoid the delay. They delay all outgoing direct-to-trader information and all incoming orders or cancels.
The difference between what IEX does and just placing your stock exchange 38 miles from everyone else's (350us at light speed in fiber) is that while they delay incoming orders and outgoing data, IEX itself listens to data coming in from other exchanges with no delay, and uses that 350us look into the future to re-price orders before anyone else can interact with them.
Yeah, they do plan to delay everyone equally now. However in the original proposal if you used IEX's router, you weren't delayed.
I'm afraid I don't understand what the first quote means and how the person in the second one is protected. An explanation would be much appreciated.
If someone is publically offering to buy a stock for $10.00 on Exchange A (i.e. they've placed displayed limit order), then it's illegal for you to sell that stock to someone else for $9.99 on Exchange B. If that trade did happen, the order on Exchange A is said to have been "traded through". The rule protects limit orders which have the best price available from missing out on a trade just because they were sent to the wrong exchange.
I'm pretty sure that's wrong. I've never heard NMS/rule 611/etc described in those terms, and logically, it makes no sense. The point of the rule is to try and stop people eg, buying at price X when the NBBO is < X, full stop.
Here's my evidence that Rule 611 is more about protecting resting limit orders than marketable orders:
1. It's called the "Order Protection Rule".
2. It defines "protected quotations" and makes it illegal to trade through them.
3. It doesn't just apply to agency trading (where you could argue that it's meant to protect the client); it's also applicable to principal trades.
4. There's no allowance for trading off fees or latency or probability of getting a fill against price. For example, you can't choose buy immediately at $10.01 on Nasdaq instead of waiting for a 30ms round trip from Chicago at $10.00, because it's the quote on Chicago that's being protected, not you.
5. If you send an ISO order to an exchange (which basically says "don't route this elsewhere even if you see a better quote"), and it turns out that you traded through a quote somewhere, the SEC will fine you, because they're protecting that other quote, not your marketable order.
6. This quote from the SEC: "Many commenters on the proposals ... strongly supported the need for enhanced protection of limit orders against trade-throughs. They emphasized that limit orders are the building blocks of public price discovery and efficient markets. ... by enhancing protection of displayed prices, would encourage greater use of limit orders and contribute to increased market liquidity and depth. The Commission agrees that strengthened protection of displayed limit orders would help reward market participants for displaying their trading interest and thereby promote fairer and more vigorous competition among orders seeking to supply liquidity." [1]
[1] https://www.sec.gov/rules/final/34-51808.pdf
What are those buckets of money?
Also, IEXs delay is less than the delay between existing exchanges because of speed of light limits, so massively seems inappropriate.
You might be surprised (when talking about the U.S equities exchanges at least): http://anova-tech.com/wp-content/uploads/2014/09/market-data.... The LoS distances in NY are on the order of 5-30mi and the lowest latency links are over microwave and laser.
The Chicago Stock Exchange is 15 milliseconds away from all the others. There isn't much trading volume there, though [1].
[1] http://batstrading.com/market_summary/
Derivatives are traded in massive volume on the Cboe which is why the time between New Jersey and Chicago is so important
The CBOE matching engine is in New Jersey, along with the equities exchanges (http://www.automatedtrader.net/news/exchange-news/141860/cbo...). The Chicago-NJ latency race is more about futures traded on CME.
Here are some newer numbers: http://www.mckay-brothers.com/wp-content/uploads/2016/06/201...
CME -> NY4 latency is now slightly higher than that allowed by the speed of light.
The side-effects of this law and because of it not being able to achieve a 'fair' price was why IEX was created.
Edit: This is neither a pro nor anti comment. It is a factual comment, of the motivation to create IEX.
I read flashboys too and I don't remember it having anything to do with national best bid/offer laws. Was there something specific?