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The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX


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For the past several years, exchange and dark pool order types have been one of the hot topics in the US equity markets, as characterized by WSJ exposes and record SEC fines. Rather than piling on with more negativity, this talk will walk through the process of developing a new order type, from the discovery of a market structure inefficiency to the research of potential solutions, and finally, the deployment and evaluation of the result. This talk will explore how exchanges and dark pools can impact the stock market through thoughtful order type design.

This presentation was part of the QuantCon 2015 Conference hosted by Quantopian. Visit us at:

Published in: Economy & Finance
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The Genesis of an Order Type by Dan Aisen, Co-founder and Quantitative Developer at IEX

  1. 1. THE GENESIS OF AN ORDER TYPE Daniel Aisen Quantitative Developer, IEX March 14, 2015
  2. 2. 2008: Internship at RBC 2   Source:  h+p://­‐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. 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. 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. 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. 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://  
  7. 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. 8. 2009-2011: RBC Electronic Trading 8   For  discussion  purposes  only.  ©  2015  IEX  Services  LLC.  Member  FINRA  /  SIPC.  All  rights  reserved.   Source:  h+p://  
  9. 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.  
  11. 11. 2012: IEX 11   For  discussion  purposes  only.  ©  2015  IEX  Services  LLC.  Member  FINRA  /  SIPC.  All  rights  reserved.  
  12. 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. 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. 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. 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. 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. 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.  
  19. 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. 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. 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. 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. 23. 2015: IEX 23   For  discussion  purposes  only.  ©  2015  IEX  Services  LLC.  Member  FINRA  /  SIPC.  All  rights  reserved.   Source:  h+p://­‐boys-­‐michael-­‐lewis.html?_r=0