Tagged: Direct Edge

Flash Boys

I don’t skateboard. But the title of Michael Lewis’s new book on high-speed trading, Flash Boys, made me think Lewis could’ve called it DC-town & Flash Boys.

Legendary skateboarder Stacy Peralta directed the 2001 documentary Dogtown & Z-boys chronicling the meteoric rise of a craze involving slapping wheels on little boards and engaging in aerobatic feats using public infrastructure such as steps and handrails. From Dogtown, slang for south Santa Monica near Venice Beach, Peralta’s Sean-Penn-narrated film tracked the groundbreaking (and wrist-breaking) 1978 exploits of the Zephyr skateboarding team, thus the “Z-boys.”

Skateboarding has got nothing to do with trading, save that both are frantic activities with dubious social benefit. We’ve been declaiming on these pages for more than a half-decade how fast intermediaries are stock-market cholesterol. So, more attention is great if the examiner’s light shines in the right place.

If you missed it, literary gadfly Lewis, whose works as the Oscar Wilde of nonfictional exposé include Moneyball (loved the movie), Blindside, Liar’s Poker and the Big Short, last week told 60 Minutes the US stock market is rigged.

The high-frequency trading crowd was caught flat-footed. But yesterday Brad Katsuyama from IEX, a dark pool for long investors that rose out of RBC, dusted it up on CNBC with Bill O’Brien from BATS/Direct Edge, an exchange catering to fast orders.

Which brings us to why Lewis might’ve called his book DC-town & Flash Boys. The exploitation of speedy small orders goes back to 1988. In the wake of the 1987 crash, volumes dropped because people feared markets. The NASD (FINRA today) created the Small Order Execution System (SOES – pronounced “soze”) both to give small investors a chance to trade 100 shares electronically, and to stimulate volume. Banditry blossomed. Professionals with computers began trading in wee increments. Volume returned. The little guy? Hm.

Regulators have always wanted to give the little guy opportunity to execute orders like the big guys. It’s admirable. It’s also impossible. Purchasing power is king. Attempt to make $1 and $1,000 equal in how trades execute, and what will happen is the big guys will shift to doing things $1 at a time. The little guy will still lose out but now your market is mayhem confusing busy with productive.

These benighted gaffes seem eerily to originate in Washington DC. Michael Lewis says big banks, high-speed traders and exchanges have rigged markets. We agree these three set prices for everybody. But they’re following the rules. (more…)

The Auction

Boo!

What a Halloween week. To our many friends, clients and colleagues on the Atlantic seaboard assailed by Hurricane Sandy, we in Denver are rushing sunshine your direction.

Exchanges are hoping for sunshine too as trading resumes. It hinges on opening auctions. That gives us the creepy-crawlies, as though black cats were crisscrossing ahead as we ducked from ladder to ladder to avoid the falling sky.

Why? BATS Exchange saw its IPO torpedoed when the opening auction went awry. Flaws in the Facebook opening auction at the Nasdaq delayed quotes, and the fiasco lingers in recriminations and lawsuits. Knight Capital Group had bad software derail an algorithm hitting opening auctions.

We should note “closing auctions” too, since trading days begin and end with them. Some, like the Nasdaq, call them the opening and closing “cross” – not as though it’s catechism but because of what happens.

As Sandy stomped through Long Island Sound, the big equity exchanges including NYSE, Nasdaq, Direct Edge and BATS, were plotting how to get a good auction going today to restart markets dormant since Friday.

Now, stay with me. We have one aim: To explain why the Halloween auction is vital – and risky – and why auctions are both linchpins to price-discovery and the market’s Achilles Heel. (more…)

Let’s Think of Something to Say

Happy New Year! If the holidays this year seemed sweeter, the air more welcome to the well-caroled note, it’s probably because I’ve been quiet for two straight weeks.

And with good reason. The lovely KQ and I winged southward with fellow wayfarers for time over the keel on the cayes and reefs of Belize. At Queens Cayes east off Placencia past the wildlife preserve at Laughing Bird Caye, we found what one friend called “your own Corona commercial.” As the sun faded toward dusk there, we caught this grand view of our boats on Dec 11. Our companions below the surface included this delightful fellow, a spotted eagle ray. The Eagle Ray Club is a good name for a rock band. (more…)

Don’t pass Go.  I will give $200 to the first person who correctly answers two questions.

Only corporate IROs may answer. Apologies to the rest, but you’ll see why. Corporate IR pros, look up and write down your trading volume on March 4. First question: Where did your shares trade?

Second question: Which brokers executed the trades that, when added up, equaled that volume you wrote down for March 4?

Yesterday, Dow Jones reporter Jacob Bunge wrote about our drive to organize companies to petition Congress and regulators for more transparent data about their share-trading.

There’s a landing page on our website for the letter we’ve drafted. Our goal is to list 100 companies as supporters when we deliver this letter. It should be 5,500. I’ll tell you why in a moment. (more…)

Trading Goes Beyond the Edge

We were in Lake Jackson, TX, last week for Karen’s HS reunion. South Texas is a sweat lodge this time of year, but the Saint Augustine grass lies lush and luminescent under the sycamores and live oaks. And we saw not one tar ball on Surfside Beach in Freeport.

A word on trading: We expected money to move after options expirations, but changes to program-trading plans came early, on July 14, we observed in the data. So with expirations July 15-16, markets were shellacked when money shifted to other assets. The past two days have given us massive arbitrage around this shift and ahead of tomorrow’s volatility expirations. Thus, the week could end on a rough note, we fear. (more…)