The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX
•
5 recomendaciones•1,828 vistas
This document summarizes the career of Daniel Aisen and the development of a new order type at IEX to address adverse selection. It describes how Aisen worked at RBC developing algorithmic trading strategies, which led him to join IEX to build a dark pool. IEX initially had little adverse selection, but it grew as market share did. IEX then developed a "discretionary peg" order type using its speed bump to avoid trading at prices that were soon to become stale, reducing adverse selection.
Recomendados
Recomendados
Más contenido relacionado
La actualidad más candente
La actualidad más candente (20)
Destacado
Destacado (10)
Similar a The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX
Similar a The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX (20)
Más de Quantopian
Más de Quantopian (20)
Último
Último (20)
The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX
- 1. THE GENESIS OF AN ORDER TYPE Daniel Aisen Quantitative Developer, IEX March 14, 2015
- 2. 2008: Internship at RBC 2 Source: h+p://www.wallstreetandtech.com/trading-‐technology/rbc-‐assembles-‐key-‐management-‐team-‐to-‐run-‐e-‐trading/d/d-‐id/1263002? For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. Rob Brad
- 3. 2009-2011: RBC Electronic Trading 3 • Product: a suite of algorithms to trade large orders in the stock market • Customer: institutional investors (mutual funds, pension funds, hedge funds, etc.) For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 4. 2009-2011: RBC Electronic Trading 4 • Two types of markets where institutional brokers trade stocks: 1. 11 public exchanges • 60% market share • Publish quotes 2. 40 “private” dark pools • 20% market share • Don’t publish quotes • Derive prices from exchanges For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 5. 2009-2011: RBC Electronic Trading 5 • Focused on two micro-level trading objectives: 1. How to buy/sell as much stock as possible in a given moment (THOR) 2. How to expose LARGE orders to the market and have a chance of getting filled without market impact (dark pools) For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 6. 2009-2011: RBC Electronic Trading 6 For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. • Standard use case for a dark pool: midpoint peg order which floats at the average price of buyers and sellers on the exchanges Source: h+p://www.itg.com/news_events/papers/AdverseSelecRonDarkPools_113009F.pdf
- 7. 2009-2011: RBC Electronic Trading 7 • Two main challenges with resting orders in dark pools: 1. Getting “sniffed out” (market impact) 2. Adverse selection (e.g. buying immediately before a downtick) For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 8. 2009-2011: RBC Electronic Trading 8 For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. Source: h+p://www.itg.com/news_events/papers/AdverseSelecRonDarkPools_113009F.pdf
- 9. 2009-2011: RBC Electronic Trading 9 • Two ways a buy order in a dark pool can get adversely selected: 1. Getting “run over” by a larger seller 2. A new seller enters the market elsewhere at a lower price, creating a brief arbitrage opportunity • We call the latter structural arbitrage; it only exists because the dark pool can’t update its prices fast enough For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 10. THERE’S ONLY SO MUCH A BROKER CAN DO
- 11. 2012: IEX 11 For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 12. 2012: IEX Design 12 • Dark pool goal: prevent adverse selection on IEX using a speed bump For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 13. 2013: IEX Build/Launch 13 • Goal: prevent adverse selection on IEX • Launched in October 2013 • Little/no adverse selection for first several months For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 14. 2014: IEX 14 • Toward the middle of 2014, as market share grew, so did adverse selection For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. 0% 3% 6% 9% Jan-‐14 Apr-‐14 Jul-‐14 % Res&ng Orders Adversely Selected Midpoint Peg
- 15. 2014: IEX 15 • Our speed bump was effective at preventing after-the-fact arbitrage • Orders were now getting adversely selected 1-2 ms before the market moved For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 16. 2014: IEX 16 • Potential solutions: 1. Impose stricter throttling 2. Impose fees for exceeding order/trade ratio thresholds 3. Turn off those customers • These target the arbitrage traders, but don’t eliminate the blind spot For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 17. 2014: IEX 17 • Key insight: A price change in the market is not a single instantaneous event; it is a coordinated event across all 11 exchanges • Arbitrageurs were trading while the market was transitioning to a new price For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 18. USE THE SIGNAL TO PREVENT THE ARBITRAGE
- 19. 2014: IEX 19 • How can IEX keep up with the fastest traders: • Speed bump gives us a head start • Unlike a arbitrage trader, false positives don’t result in losses • Introduced a new order type called discretionary peg: • Alternative to midpoint peg • Avoids trading at soon-to-be-stale prices when market is in transition For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 20. 2014: IEX 20 • Introduced discretionary peg order type in November: • 1-2% drop in fill rate • Adverse selection: 9% -> 3% For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. 0% 5% 10% Jan-‐14 Apr-‐14 Jul-‐14 Oct-‐14 Jan-‐15 % Res&ng Orders Adversely Selected D-‐Peg Midpoint Peg
- 21. 2015: IEX 21 • Lessons learned: 1. Define and track metrics – we could have responded sooner 2. Don’t punish the traders; eliminate the arbitrage opportunity For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 22. 2015: IEX 22 • Final thoughts: • It’s the broker’s job to navigate the market effectively on behalf of their clients • If an exchange or a dark pool has a blind spot, not much the broker can do • Can’t blame someone for trying to profit off an inefficiency; exchanges and dark pools have the responsibility to ensure they don’t have any blind spots For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved.
- 23. 2015: IEX 23 For discussion purposes only. © 2015 IEX Services LLC. Member FINRA / SIPC. All rights reserved. Source: h+p://www.nyRmes.com/2014/04/06/magazine/flash-‐boys-‐michael-‐lewis.html?_r=0