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Micro-Structure & Exchanges: A Complicated Relationship

CalibratedConfidence's picture




 

This past Tuesday, news hit that BATS Global Markets was in the process of settling with the Securitues and Exchange Comission on the claim that Direct Edge provided unfair perks to certain high frequency traders (HFT), a development that might set a pivotal precedent in the market structure debate.

News of the possible settlement was preceded by the departure of William O’Brien, who ran Direct Edge with its twin exchanges before selling it to BATS in early 2014, becoming the second-in-command of the combined entity.

In an effort to challenge Brad Katsuyama of "Flash Boys" fame live on TV, O'Brien stated that his exchange’s matching engine (used to match buy and sell orders) used direct feeds provided by other exchanges.

However Direct Edge’s matching system used staler data from the SIP (securities information processor) - not the direct feeds - for several important housekeeping tasks. In a spectacular public relations failure, the New York Attorney General forced BATS to publicly correct O’Brien’s statements.

One person in the mix who might have been forgotten is Haim Bodek. After coming out publicly in Scott Patterson’s "Dark Pools" as a critic of exchanges that cater to HFT, Haim was on a one-man crusade to save his reputation by making a convincing case against the HFT industry.

In the end, he wound up triggering SEC investigations that (so far) led to an exchange head being forced to step down. For those unaware, Haim was also the real star of the VPRO film "Wall Street Code." In the film, Haim used the example of skipping in line while buying Metallica concert tickets:

In a phone conversation with Benzinga, Haim noted this (yet to be announced) settlement would set precedent for future concerns about abuses taking place on securities exchanges.

Direct Edge wasn’t the only exchange, nor the first exchange, to do what it did, which was the creation of symbiotic relationships between exchanges and HFTs.  

In light of the major events that took place over the past year, aside from announced investigations by the SEC and NYAG, the recent actions taken by U.S. exchanges are suspect, whether they are attempts to engage in damage control or to sweep some things under the rug.

Select Microstructure-Related Events

Month

Year

Event

August 1

2012

Knight Capital $440M loss

August

2012

Goldman $100M options trading glitch with trades eventually busted

August 22

2012

Nasdaq goes dark for 3 hours (NASDARK)

September

2012

Hold Brothers Brokerage fined for "spoofing"

September

2012

The Wall Street Journal runs an in-depth article on Hide-Not-Slide order type

September

2012

NYSE sued $5M for selling faster data access to special clients

January

2013

The Problem Of HFT is released by Haim Bodek highlighting "special order types" and exchange abuses

August

2013

BATS & Direct Edge merger talks surface - Deal takes place so quickly it finishes ahead of schedule

October

2013

Direct Edge publishes its "Order Type Guide"

November

2013

Wall Street Code is released

February

2013

O'Brien misinforms the public about what Direct Edge uses to match orders

July

2014

O'Brien steps down as President of BATS Global Markets

July 28-29

2014

All US equity exchanges adopt rules on the usage of SIP and direct feeds

August 1

2014

Euronext CEO steps down

August 5

2014

Information about a possible settlement with BATS relating to special order types is reported

 

The year 2012 was riddled with HFT problems. BATS IPO failure; Facebook launch delayed; seven or eight instances of self-help declarations by several exchanges in August; Nasdaq’s three-hour outage in August; Goldman’s trading glitch; Knight’s trading glitch (affectionately known as the “Knightmare on Wall Street"); and the unprecedented $5 million fine imposed on NYSE for speeding up its private data feeds vis-a-vis the SIP.

Continue reading here

 

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Sun, 08/10/2014 - 19:52 | 5074280 BeetleBailey
BeetleBailey's picture

Kabuki theater for the informed.

Total fog for the 99%

means.....not much will change, happen or no one will be jailed....

...which is criminal...

Sun, 08/10/2014 - 12:37 | 5072785 Pemaquid
Pemaquid's picture

This is what has found its way into the sunshine. Imagine all the shit that is never discovered.

Sun, 08/10/2014 - 09:10 | 5072352 Bossman1967
Bossman1967's picture

The markets are riged and fines are comissions that are paid to look the other way. But after its all said and done... I was watching last batman this am and where is Bane?

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