IS 356 IT for Financial Services The Market for the Next 100 Years! pptallon/is356.htm.
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Transcript of IS 356 IT for Financial Services The Market for the Next 100 Years! pptallon/is356.htm.
IS 356IT for Financial Services
The Market for the Next 100 Years!
http://www.evergreen.loyola.edu/~pptallon/is356.htm
April 19, 2023© Paul Tallon 2/28
April 19, 2023© Paul Tallon 3 / 32
Outline
How is NASDAQ different from NYSE? Technology
SelectNet SOES (small order execution system)
SuperSOES Understanding order flow: some tricks of the trade
SuperMontage Existing market shortcomings
April 19, 2023© Paul Tallon 4 / 32
Competing Business Models
NASDAQ(+ Island/Instinet)
Spear, Leeds & Kellogg (ECN)
Terra Nova Trading, LLC
B-Trade Services LLC
The Brass Utility, LLC*
Strike Technologies LLC*
Attain-ECN
PIM Global Equities – ECNDirect EdgeBATs
Liquidity ProvidersNone One Many
Merger w/ AMEX 11/98(later AMEX spun off)
NYSE(+ Archipelago ECN)
+AMEX (2008)
April 19, 2023© Paul Tallon 5 / 32
Auction Market Model
Floor-based Single Specialist Order-driven Capital commitment
limited to one firm Trade halts for volume
imbalances
April 19, 2023© Paul Tallon 6 / 32
Dealer Market Model
Screen-based Competing Market
Makers Quote-driven Capital commitment
from multiple firms
April 19, 2023© Paul Tallon 7 / 32
Screen-based Markets
Allow equal access to trading and market information (in theory)
World’s most common market structure Unlimited number of market
participants, so it facilitates expansion No central trading floor
− The network is the market – attack the network and the market will suffer
April 19, 2023© Paul Tallon 8 / 32
NASDAQ Level II Screen
April 19, 2023© Paul Tallon 9 / 32
Retail “Buy” Order
ASK
25.25
25.28
25.29
25.31
25.50
Retail “Buy”
MM
BID
25.00
24.87
24.86
24.85
24.84
200
Market Maker has 200 shares in
inventory.
Retail investor wants to “Buy” 200 shares @
25.25
MM
MM
AA
AACC
CC
DD
BB
BB
DD
April 19, 2023© Paul Tallon 10 / 32
Execution – Scenario 1
Retail “Buy”
MM
BID
25.00
24.87
24.86
24.85
24.84
200
Trade Report: 200 @ 25.25Trade Report: 200 @ 25.25
ASK
25.25
25.28
25.29
25.31
25.50
Market Maker fills “Buy” order at
best offer price of 25.25.
Retail investor wants to “Buy” 200 shares @
25.25.
“Sell”
April 19, 2023© Paul Tallon 11 / 32
Retail “Buy” Order – Scenario 2
Retail “Buy” MM
BID
25.00
24.87
24.86
24.85
24.84
“Sell”
Trade Report: 200 @ 25.25Trade Report: 200 @ 25.25
Market Maker does not have shares in inventory. Market Maker sells short 200
shares at 25.25.
ASK
25.25
25.28
25.29
25.31
25.50
Retail investor wants to “Buy” 200 shares @
25.25.
April 19, 2023© Paul Tallon 12 / 32
Cover Short Position – Scenario 2
ASK
25.25
25.26
25.27
25.28
25.50
Retail “Buy”
MM
BID
25.12
25.00
24.87
24.85
24.84
Market Maker raises its “Bid” price to build inventory which affects other prices.
Retail “Sell”
200
Retail investor wants to “Sell” 200 shares.
April 19, 2023© Paul Tallon 13 / 32
Execution – Scenario 2ASK
25.25
25.26
25.27
25.28
25.50
MM
BID
25.12
25.00
24.87
24.85
24.84
Market Maker “Buys” 200 shares at its best bid price of 25.12
Trade Report: 200 @ 25.12Trade Report: 200 @ 25.12
Retail “Sell”
200
Retail investor “Sells” 200 shares to Market Maker.
“Buy” 200
shares
April 19, 2023© Paul Tallon 14 / 32
BID
75.25
75.24
75.20
75.19
75.18
Preferencing Explained
ASK
75.30
75.31
75.32
75.35
75.39
Retail “Buy”
MM
Best bid in the market at this point is $75.25 so broker must sell at this price and no worse.
Retail “Sell”
1000
Broker receives order to sell 1000 CSCO at best market price. He asks MM to buy them.
Broker
CSCO
Preferred arrangement75.20 – 75.35
GLDM
LEGG
MM
MM
GLDM
LEGG
SCHB
SCHB
MM buys at $75.25 and kicks back to broker $0.005 per share or $5. (1M shares daily = $1.2M yr)
you buy from me at this price
I buy from you at this price
April 19, 2023© Paul Tallon 15 / 32
BID
75.25
75.24
75.20
75.19
75.18
Preferencing Explained.. cont’d
ASK
75.30
75.31
75.32
75.35
75.39
Retail “Buy”
MM
Best offer in the market at this point is $75.30 so market maker must sell at this price and no worse.
Brokers
Buy 2 x 500 from MM
Broker
CSCO
Bought 1000 at $75.25 even though bid $75.20
GLDM
LEGG
MM
MM
GLDM
LEGG
SCHB
SCHB
MM sells at $75.30 and kicks back to brokers $0.005 per share or $5. (1M shares daily = $1.2M)
Sales $75300Purchases $75250Kickback $5 + 2x$2.50Profit $40 per tradePer day 1m $40,000Annually $9.6m
April 19, 2023© Paul Tallon 16 / 32
NASDAQ Technology - SelectNet Order delivery and negotiation system (large orders usually) A communications tools between market makers and brokers System does not cross or execute orders SelectNet orders received at posted bids or offers must be
executed at that price Can be used to preference an order to a specific market maker
or to broadcast the order to the entire market − preference: a way to gain order flow without having to post the best
bid-offer (possible payment for order flow) Some large traders (e.g., mutual funds) can directly send an
order to the market through their broker – “pass-through”
April 19, 2023© Paul Tallon 17 / 32
NASDAQ Technology - SOES Electronic system for routing small orders from brokers to market
makers Automated system – if a market maker’s quote is hit, they cannot
back out of the trade Originally capped at 1,000 shares maximum Problems from day traders
– SelectNet trade followed rapidly by SOES order– Creates dual liability: “SOES bandits”
NASDAQ dropped limit – at market maker’s discretion Day traders moved to SelectNet instead – developed very fast order
execution interface: installed an automatic “back-away” complaint procedure, forcing market makers to comply.
(small order execution system)
April 19, 2023© Paul Tallon 18 / 32
NASDAQ Technology - SuperSOES Automated execution up to 9,900 shares 5 second delay between orders received from same broker Difficult for market maker to back away from a trade ECNs were included in the montage (or display of available
market makers) for each share but were liable to be cut off if their response to a trade request was deemed “slow”
Went live late 2001 Set the stage for SuperMontage
April 19, 2023© Paul Tallon 19 / 32
Comparisons (NASDAQ vs. SuperMontage)
Quotes on one screen;Orders on another
Everything on one screen
April 19, 2023© Paul Tallon 20 / 32
SuperMontage - features Shows depth of market on buy and sell side Enter multiple quotes/orders at the same time for a stock Ability to hold stock in reserve – don’t show the entire
order to the market at any one time. To avail of this, you must show a minimum order size of 1,000
Anonymity is possible – market maker’s name is masked Broker could previously cancel an order within 10 seconds
of submission (even if it was accepted by a market maker) – that is now removed so execution is automatic (ECNs can still refuse an order)
April 19, 2023© Paul Tallon 21 / 32
SuperMontage PowerView Screen
QuoteView
DepthView
(size is in 100’s)
April 19, 2023© Paul Tallon 22 / 32
Higher Fill Rates
93% of marketable orders are fully or partially executed, up from 67% pre-SuperMontage
A marketable order is a limit or market order that is executable at the time the order enters the system
April 19, 2023© Paul Tallon 23 / 32
Faster Execution Rates
Execution speed improve by almost 90%
April 19, 2023© Paul Tallon 24 / 32
Greater Depth and Use of Reserve
During the pre-launch period, approx. $125,000 was available 5 cents from the inside price on both the bid (buy) and ask (sell) side in Starbucks. About $95,000 of that was displayed.
This increased to $190,000 in the post-launch period. About $95,000 of that was displayed also.
April 19, 2023© Paul Tallon 25 / 32
Other Technology: Heat MapsOther Technology: Heat Maps
After-hours quotes…
April 19, 2023© Paul Tallon 26 / 32
Opening Prices – still some concerns
No consolidated order book for all market makers Opening prices are set between 8:00am and 9:30am Problem came to a head with dot.com IPOs Possibility of wide range of quotes at market open,
trades executed at inappropriate prices – not at the inside bid or ask
April 19, 2023
Intra-day Volatility (NYSE)
October - December 1999
0.00%
0.40%
0.80%
1.20%
1.60%
Hal
f-Hou
r V
olat
ility
The First 1/2 Hour
Source: Robert Schwartz, Baruch College, 2008
© Paul Tallon 27 / 32
April 19, 2023
October - December 2000
0.00%
0.50%
1.00%
1.50%
2.00%
Ha
lf-H
ou
r V
ola
tili
ty
The First 1/2 Hour
Intra-day Volatility (NASDAQ)
Source: Robert Schwartz, Baruch College, 2008
© Paul Tallon 28 / 32
April 19, 2023
January - May 2000
0
0.5
1
1.5
2
2.5
3
8:00
-8:3
0
8:30
-9:0
0
9:00
-9:3
0
9:30
-10:
00
10:0
0-10
:30
10:3
0-11
:00
11:0
0-11
:30
11:3
0-12
:00
12:0
0-12
:30
12:3
0-1:
00
1:00
-1:3
0
1:30
-2:0
0
2:00
-2:3
0
20:3
0-3:
00
3:00
-3:3
0
3:30
-4:0
0
4:00
-4:3
0
Ha
lf-H
ou
r V
ola
tili
ty
The First 1/2 Hour
Intra-day Volatility (London)
Source: Robert Schwartz, Baruch College, 2008
© Paul Tallon 29 / 32
April 19, 2023
January - May 2000
0
0.2
0.4
0.6
0.8
1
1.2
1.4
9:00-9
:30
9:30-1
0:00
10:00
-10:30
10:30
-11:00
11:00
-11:30
11:30
-12:00
12:00
-12:30
12:30
-1:00
1:00-1
:30
1:30-2
:00
2:00-2
:30
2:30-3
:00
3:00-3
:30
3:30-4
:00
4:00-4
:30
4:30-5
:00
Clos
ing Call
Ha
lf-H
ou
r V
ola
tili
ty
The First 1/2 Hour
Intra-day Volatility (Euronext)
Source: Robert Schwartz, Baruch College, 2008
© Paul Tallon 30 / 32
April 19, 2023© Paul Tallon 31 / 32
Current Issues NASDAQ merged with Island/Instinet (ECN): April 22, 2005 Countered merger between NYSE and Arca|Ex: April 20, 2005 Fight between NYSE and NASDAQ goes international
NYSE EuroNext NASDAQ OM … interest from Dubai, Deutsche Bourse, etc.
Evolution of hybrid markets
April 19, 2023© Paul Tallon 32 / 32
For Next Class… Read
– ECNs – check out http://en.wikipedia.org/wiki/Electronic_Communication_Network
– Articles on class website