There's a much better book that came out this year by the great Don Mackenzie "Trading at the Speed of Light". It doesn't have the cutesy narratives of a Michael Lewis book, but it's insanely informative
https://www.amazon.com/Trading-Speed-Light-Algorithms-Transforming-ebook/dp/B08NY31P1Z/
(Full disclosure: my work on agent-based modeling of financial markets is mentioned in there)
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Trading at the Speed of Light: How Ultrafast Algo… | - | - | 4.8/5.0 |
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Item | Current | Lowest | Reviews |
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Trading at the Speed of Light: How Ultrafast Algo… | - | - | 4.8/5.0 |
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>48.5% of the spread going to MMs
Historically, that's pretty low. In most markets, when you cross the market to immediately execute an order you expect to pay the spread. You could place a limit order otherwise (but I think you get charged commissions for limit orders). This is why I've tried to hammer in the idea that free trading isn't really free. Crossing the spread
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>So from what I remember reading, NBBO relies on SIP which has two issues of not including odd lots and having to compile all data feeds and average the number, which takes more time than not having to compute and rely on all feeds to arrive.
IEX, for instance, claims that the price improvement, isn't really price improvement, that a lot of it comes from stale pricing.
This topic is pretty sticky and some people have very strong opinions about it; market data is so noisy that I'm rarely comfortable drawing strong conclusions, and also the bulk of my work was in futures.
Yeah, there are some problems with the SIP. One of them is that it doesn't publish enough data. For trade feeds, it doesn't give a lot of information that the direct feeds give. And personally, I think it should publish full depth of book, market-by-order information. But generally, I prefer to defer to Dave on SIP-related matters.
As a technicality, I'm pretty sure it's not averaging things or waiting around for all feeds to arrive since it's event-based and not on a timer. When it receives a top-of-book quote from an exchange it does a couple of checks and then pushes the message. The message will contain some codes that'll tell you if that quote contains the new best bid or ask levels. (probably should double-check this info since it's been a while for me)
I'm not sure how I feel about including odd lots in the NBBO. I don't think they represent enough liquidity and I can think of more than a few ways they could be used to manipulate the spread and NBBO.
Sure direct feeds are faster than SIP, and yeah that episode where citadel got caught pantless with FastFill was both hilarious and troubling.
But this part of the convo was mostly a digression because that still doesn't let internalizers make the spread wider than the NBBO.
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>If internalizers and PFOF vanished, would brokers then be forced to route on exchange and MMs will have to compete more directly against each other (and HFTs) on the lit markets. Isn't this a win win situation with the only imo minor downside being commissions?
I think that is the gist of the argument (even if it's slightly oversimplified). The problem is that people probably aren't going to accept going back to a commission world. What the apes have paved the way for is waking retail up to the potentially high costs of free trading. That's why we're passionate about this project and think we can both provide a ton of value and create an environment to keep the knowledge revolution going.
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>Great info btw! Do you have any recommended books or websites that go in detail over market maker models, internalizers etc?
Donald Mackenzie's "Trading at the Speed of Light" came out this year and while it isn't entirely about those things, it covers some of it and paints a big picture. Mackenzie does great work.
(Full disclosure: you can find me on page 241 with an academic group out of the Copenhagen Business School that I've been working with for a few years. They were the first to license the agent-based modeling platform for financial markets that I created and is now a part of Urvin. I can't say much just yet, but there's some big news coming out of those modeling efforts in the next few months and some even bigger news about the future of the platform and making it accessible to everyone)