Tuesday, June 20, 2017

Are Flat Fees the Solution to Maker-Taker?


While most exchanges have a maker-taker pricing model, one that pays rebates to market makers for adding liquidity, or charges a modest fee for taking liquidity, IEX offers a fresh approach to an alternative by offering one flat fee rather than incentives and rebates.  


IEX Flat Rate Fee Schedule


IEX, the newest stock exchange, does not charge for connectivity or data fees, and they also do not encourage a Maker-Taker environment.  IEX prefers to implement flat rate fees based on order visibility.  For non-displayed liquidity brokers will pay a flat rate of $.0009/share, whether they are making or taking liquidity.


For displayed liquidity, there is NO fee whether making or taking liquidity.  Here, the choice for the customer is whether to take the discount for making their order visible, and thus part of the NBBO, or pay extra to hide it.


The flat fee schedule utilized by IEX puts the incentive where it should be, on displaying your liquidity and aiding price discovery in the market.
Maker Taker Pilot
There was talk of a pilot program to measure the impact that reduced fees would have on market quality and behavior.  In 2016. the Securities and Exchange Commission’s Equity Market Structure Advisory Committee recommended the pilot program.   SEC Chairwoman at the time, Mary Jo White, stated that the pilot would be voted on by the commission in 2017.  Since then, new developments such as President Trump in the White House and turnover at the SEC have put the pilot on hold.   
Prior to Trump’s inauguration, Mary Jo White resigned as SEC Chair. According to Trump’s advisors, incoming SEC officials are looking at broader reform rather than piecemeal reform with Maker-Taker.   Paul Atkins is the former SEC commissioner, who now advises President Trump on financial regulation matters.  Mr. Atkins is actually an opponent of Reg NMS, and a proponent for a holistic overall review of the market.  
It will be interesting to see what the coming months have in store from the new administration, and new SEC leaders.  While exchanges need a compensation for providing a valuable service, a flat fee would result in revenue for the exchange, without creating a conflict of interest with rebates.   
There is no easy answer for such a complex situation.  Most traders and brokers agree, however, that Maker-Taker needs to go!  (and we do not need a pilot program to tell us that).  
Great Point Capital has the in-depth knowledge of the market structure and order types, including the available order types that allow you to go directly to dark pools, to place orders at the midpoint of the NBBO, and capture rebates by adding liquidity.  We combine this knowledge with valuable tools like the Takion software platform, to let you direct orders to the venue giving the best outcome.
Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online trading broker performance.

Tuesday, June 13, 2017

Maker-Taker Influences Order Types

Each exchange has their own type of orders, with each order type carrying their own fee schedule.  Nasdaq recently developed a Retail Post Only Order, which was designed for the sole purpose of assisting retail brokers in avoiding access fees.  This particular order type would have allowed for it to cancel for any reason, rather that fill with an adjusted price.

For instance, if a retail broker receives your order to buy at 10.25, and the market is 10.25x10.26, they send it to the exchange to add liquidity, earning a rebate.  Now suppose that just as it sends the order, the market changes to 10.24x10.25.  Your order just became marketable, so instead of earning a rebate for adding liquidity, your broker will now have to pay to remove liquidity!

The Retail Post Only Order protects this from happening by canceling the order if it becomes marketable and would remove liquidity. That order would then likely be re-routed back to the third party that pays for the broker’s order flow to be filled, instead of to the exchange.

Proponents argue that this choice is good for competition that is good for markets.  Opposition to these types of orders claim that these are one- sided order types benefit only the select few while distorting market pricing, which is never good for investors.
Nasdaq withdrew their request for this order type in January of this year, under much scrutiny.  
Add-Liquidity Orders (ALO)

An ALO order is an Add Liquidity Only order, and is executed only if it adds liquidity as a market maker.  The goal behind these order types is once again to assist the user in controlling their costs, and reducing fees.   


They are used, however, to game the system, as entering a marketable ALO order forces the other side, which should have gotten a liquidity rebate, to now be a Taker and incur a cost.  This happens with non-display orders that fall between the NBBO.  If the market is at 10.14x10.16, and I have a hidden order to sell at 10.15 on ARCA, if an ALO order comes in to buy at 10.15, I would become the taker, even though I was there first.  

If my order was visible (NBBO at 10.14x10.15), the ALO order wouldn’t cross at all, it would just sit on that bid at 10.14, meaning a trade that would otherwise occur and aid price discovery doesn’t happen simply due to the maker-taker pricing model.

Great Point Capital has vast knowledge of the market structure and order types, including  available order types to go directly to dark pools, to place orders at the midpoint of the NBBO, or to capture rebates by adding liquidity.  We combine this knowledge with valuable tools like the Takion software platform, to let you direct orders to the venue giving the best outcome.

Great Point Capital has over 100+ prop traders actively trading the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or Austin Office, to learn  how we can successfully trade together generating high performance results.  We are one of the elite few able to offer access to Takion Software, enhancing your online trading performance.

Tuesday, June 6, 2017

Maker-Taker Influences Order Routing and Price Discovery


Reputable online brokers and traders all agree, the Maker-Taker pricing model distorts the market and alters the way stock orders are transacted by market participants.  Maker-Taker is a pricing model existing on most exchanges, encouraging liquidity in their venue.  
Most stock exchanges, although not all, and all are not the same, will give a small rebate to traders and investors upon execution of their limit order when they are providing liquidity to the market, which is the maker part of Maker-Taker.   These liquidity rebates drive the Maker-Taker model.  

Conversely, exchanges will charge a modest fee to the market takers, those that take liquidity by entering either market orders or marketable limit orders.  Maker-Taker is a hot topic among traders and brokers, many oppose the practice as brokers will use the exchanges that give the most advantageous rebates instead of committing to the best execution, which createis a conflict of interest.

A rebate reward system combined with an already predatory environment including high frequency trading algorithms overtaking online equity trading in all venues across the market.  High frequency trading (HFT) firms use very sophisticated and specific algorithms designed to seize as many liquidity rebates as possible, regardless of the impact this may have on the market or the National Best Bid Offer (NBBO).

Maker-Taker And Price Discovery

Traders and brokers have been calling for an end to the Maker-Taker system, claiming that it  most certainly influences order-routing decisions, and distorts price discovery.  While different exchanges having different fee schedules, this gives brokers incentive to route their orders so that it is most advantageous to them, instead of giving ‘best execution’ to their client.
An example of the Maker-Taker model occurs when an exchange pays a market maker .002 per share to provide liquidity, and charges the market taker .003 per share, leaving the exchange to keep .001.  With millions of shares traded on a daily basis by HFT firms, even the small rebates given to market makers add up significantly to billions of dollars simply by utilizing computerized algorithms based on their trading strategies and buildt to elicit the most rebates.

Exchanges use maker-taker like marketing, drawing executions to their marketplace. If you can lure liquidity-adding orders with big rebates for that liquidity, the other side of the trade has to come to you, which increases volume, and profits, for the exchange. Of course, the opposite is also true - those taking liquidity have price sensitivity as well, and try to go to the exchange with the lowest cost to remove liquidity.

This is why we have seen nearly all exchanges create separate exchanges that differ only in the pricing model.  Nasdaq owns PSX and BSX exchanges, which have “inverted” pricing models that pay rebates to remove liquidity, while those adding liquidity pay small fees. EDGE does the same with EDGA, BATS the same with BATY.

Those that oppose the Maker-Taker system believe that the public view of the current bid/offer price is not accurate due to the rebates and discounts.  HFT firms will buy and sell at the same price, just to exploit the rebates.  This activity can mask the true price discovery of stock assets.  

Great Point Capital has over 100+ prop traders actively trading the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or Austin Office, to learn  how we can successfully trade together generating high performance results.  We are one of the elite few able to offer access to Takion Software, enhancing your online trading performance.

Monday, May 29, 2017

How Latency Arbitrage Affects the NBBO


Latency arbitrage is a result of several factors including co-location, HFT, flash trading, and SIP latency, all with their own consequences to the marketplace.  Latency arbitrage, however, has a direct effect of contributing to an altered NBBO.  The National Best Bid Offer, (NBBO), is supposed to be the one accurate price of a stock across the entire market, from all exchanges and off exchange venues. It is intended to be a representation of the “best price.” The problem with this intention is that it is impossible to instantaneously update every single participant in the market, even the national exchanges, at the very moment when a change occurs to the NBBO.  
Information about all stock price changes need to travel among all market participants and the speed at which that occurs varies greatly depending upon the distance between the firms, and the technology a firm is using.   This means that all market participants, including the national exchanges themselves, see a different view point of the NBBO at the exact same moment in time.  This information leakage is not the only pitfall of latency arbitrage.  When these privileged firms execute their privileged trades, the NBBO is actually altered by these front-running executions.  
There may be no quick solution to this latency problem, and maybe not even a long drawn out solution, but there are some tools available now that offer some assistance to traders dealing with this problem.  If we cannot stop the latency arbitrage as we know it, we can tackle it another way – with modern day latency arbitrage tactics.
One tool addressing this very issue is the IEX Signal that is used in their proprietary D-Peg® and Primary Peg orders.  The signal acts like a yellow traffic signal, warning a trader of an upcoming change to the NBBO.  Used for a predictive tool, this IEX signal is utilized in these proprietary orders, and is also termed a ‘crumbling quote indicator’.  It predicts an upcoming price change to the NBBO, basically by observing a stock’s NBBO activity, any changes in that price, and then compiling a prediction of which way it’s moving.  IEX’s signal predicts the upcoming NBBO change, and moves their D-Peg orders out of the way, protecting the investor.
This may be one small tool in a very large fight against a long-time practice, a practice the privileged participants are not willing to give up too easily.  With a computer algorithm conducting trades at lightning speed, we all must realize that we are now at a crucial point in the structure of our financial markets. Latency arbitrage must still be tolerated, although the time has come to take action whenever possible.

Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.

Monday, May 22, 2017

Latency Arbitrage Uses Predatory Computer Algorithms


Latency arbitrage occurs when one party exploits a time disparity and earns a profit, typically with a computer algorithm, when that trade is executed solely due to a latency advantage.  Latency arbitrage has caused several heated discussions amongst all market participants, the government law makers and the SEC for many years now, yet this unfair access to US equity markets is still the core strategy of many predatory trading firms.  
An arbitrage occurs when a simultaneous purchase and sale of a stock is executed by a computer algorithm, and earns a profit based on a price difference.  Latency describes the time difference that firms receives the same publicly traded stock information compared to other one another, not all firms receive the same information at the exact same time.  Thus, a latency arbitrage happens when a firm earns a profit from the purchase and sale of stock when that transaction was executed because of a latency advantage.  
Firms pay large premiums to co-locate their equipment right next to an exchange’s servers, and pay a steep price for premium data feeds, all to reduce their latency.  Cutting edge technology with the purchase of raw data feeds, combined with a reduced latency, allows these firms to see the NBBO substantially quicker than what is publicly available through the Securities Information Processor, (SIP).  
Let’s say that a firm issues a buy order to pay the midpoint of the NBBO (the National Best Bid and Offer) for stock XYZ, and the current market for XYZ is $10.10 x $10.11. Their bid will be at $10.105. Predatory HFT firms, using faster data feeds and co-location to reduce the transmission times, may see that the $10.10 bid is now gone and the market is now $10.09 x $10.10. However, the NBBO has not changed yet, since the SIP is slower than the HFT firms, so that midpoint order is still resting at $10.105. For the HFT firm, it is simply a matter of selling at $10.105, and immediately buying back at $10.10, making a half penny.
While the half penny earned may seem miniscule, keep in mind that their computers are doing this all day long, and with the sheer volume of trades all those pennies add up to billions of dollars.  Billions of dollars that is essentially skimmed off the top of your college savings, the average middle class retirement fund, and hard earned investments.  
Add the fact that the offending firm performing the latency arbitrage assumed absolutely no risk whatsoever.  By seeing the true market before the rest of the world adjusts their orders, they know that their trade is a pretty sure bet.  All due to a speed, or latency, advantage.
This is extremely frustrating for the firm placing the original order as they are trying to get a fair price in the middle of the spread.  At the time of execution, however, they end up paying beyond the best offers in the market.
Another scenario arises due to the multiple venues available.  Various dark pools in addition to the national exchanges, can each have liquidity available, but as you go through collecting that liquidity, HFT firms can front run your order. Assume the same firm above was attempting to buy 5000 at $10.11, and the NBBO showed that quantity available at that price. But as the firm begins to send orders to various venues to purchase that amount, HFT firms see that activity, and jump ahead of the order to take it all at $10.11. The original firm may only get a few hundred shares, instead of the 5000 they saw when they placed the order. Now they are required to pay $10.12 if they want to buy the balance.
A trader gets whiplash from this ‘now you see it, now you don’t’ scenario.  Just by placing the order, they alert the HFT’s of their intention, and can plan on closing at the higher price, unless they find a way to play in the latency game.  
Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.

Tuesday, May 16, 2017

Discretionary Peg (D-Peg®) Order Predicts Price Changes




IEX is the newest stock market in the United States, founded by Brad Katsuyama and colleagues who sought answers to questions others did not even know existed.  Brad and his team were recently depicted in the “Flash Boys”, the Best Seller by Michael Lewis.


IEX’s proprietary D-Peg order was designed to protect against structural arbitrage by predicting changes to the NBBO.  HFTs know when the NBBO is going to change, because they can cobble together the faster direct feeds from each exchange, and build their own NBBO.  If you are trying to get a fill at the midpoint of the NBBO, you do not want to get a fill and then have the market immediately move against you.  The proprietary signal by IEX attempts to predict that upcoming change to the NBBO, and will move D-Peg orders out of harm’s way.


For example, if you have an order in to trade at the midpoint of the NBBO, while the market is 33.95 x 33.96, a favorite strategy of the HFT is to see the quote changing to 33.94 x 33.95, sell the midpoint to you at 33.955 right before the quote change occurs, thus allowing them to buy it back immediately at 33.95 and make a half-cent profit.  To highlight just how much this strategy is occurring, in January 2017 47% of all midpoint volume on EDGX executed within 2ms of an NBBO change.


Another way to look at it would be to see how often there is no price movement after a trade at the midpoint, which is what you want to ideally see.  On EDGX, for example, there is no price movement within the following one second following a midpoint execution, only 46% of the time.  


IEX’s D-Peg orders are designed to keep you out of this predatory environment by moving you away from the midpoint if the NBBO is about to change.  There is no change in the NBBO one second after a midpoint execution on IEX 78% of the time, and only 5% of IEX’s midpoint volume is done within 2ms of a change in the NBBO.


This “crumbling quote indicator” does not in any way impede regular trading, as it is only activated for a very short period of time, five seconds per day per symbol, on average volume basis.  Protecting resting orders during times of high HFT activity can provide higher trading quality on IEX, and make a huge difference to investors.


Great Point Capital uses both IEX’s D-Peg and Primary Peg Orders.  Contact Great Point Capital today for collaboration of successful day trading strategies.

Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.

Monday, May 15, 2017

Latency Disparity Contributes to Arbitrage


Reg NMS and the current fragmented market are obvious contributing factors to latency issues, although there a couple of additional reasons that stand out as to why not all firms receive the same information at the same time.  One contributing factor to this latency disparity is of course the speed of the Securities Information Processor (SIP), and another is the fact that firms co-locate their equipment to the servers of the exchanges.  This advantage of speed combined with a predatory computer algorithm for trading, gives a very unfair advantage of access to see the public NBBO data before trading firms with a slower connection.  
SIP
The SIP is tasked with centralizing all stock market data, then disbursing that data at the same time to all market subscribers.  the SIP has put much focus on improving its latency, although direct data feeds are historically faster than the consolidated feeds.    Some are of the mindset that reducing the SIP latency will create a more fair and efficient market, the issue of latency arbitrage is much more complicated than just reducing the latency of the SIP.  
The SIP latency refers to the time that it takes to receive all stock information, compile it together, aggregate and assemble all data, and then dispense it out.  The latency problem with the  SIP is not the time that it takes to perform these functions, even if that time is improved, it is with the method of disbursing all data.  The transportation of that data is where the challenges lie.  
There will always be a latency issue involved with consolidated data compared to direct data feeds, because there are various sources for the SIP information.  For example, the NYSE houses their data center in Mahwah, NJ, while Nasdaq’s server center is in Cartaret, NJ.  Just a slight different geographic location can make enough of a speed difference that a latency issue is created.
Flash Trading by Co-Location
Flash Trading refers to the practice of exchanges ‘flashing’ buy and sell order information to select premium subscribers, typically these are HFT firms, a fraction of a second prior to when they are publicly available.  This is very controversial as HFT firms use this advantageous information to trade ahead of pending orders, which is also known as front-running.
This predatory practice has been going on for quite a long time, as in 2009 Senator Charles Schumer requested that the SEC ban flash trading altogether, stating that it contributes to a two-tiered market, the privileged few and everyone else.  
Other factors such as computer algorithms, technology, regulations, and distance contribute to latency issues, however, these two main factors of consolidated feed vs. direct feed and flash trading, both lay the groundwork for the current two-tiered market structure.  
Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online equity trading performance.