Earlier quoted context omitted.
The products that still trade predominately {OTC, bilateral, non-electronic} do because non-price factors, trading conventions, and counterparty risk make it difficult or impossible to trade on a central exchange. Expressive Bidding and a mechanism that allows for matching market dynamics (OneChronos) will enable electronification and more active trading in these markets. Ten years ago, I would have said that there w…
Thanks. It is worth noting a lot of traditional OTC products since 2008 crisis have moved to either electronic (exchange, ATS, MTF etc) with CLOB/RFQ/Auction style of execution and in some causes that's coupled with central clearing. A lot of this has come from regulation - DoddFrank, MiFID2 and its still on-going. The most interesting aspect of this is that its enabled non-dealer non-dealer trading via certain venue…
Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
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Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#11220 years ago my first job out of college was with a small company doing combinatorial auctions for the institutional bond market (among other industries). In the end the chicken/egg problem of having enough liquidity was too much to overcome.
At one point we pitched the NYSE on doing the opening call as a combinatorial auction but they were not interested.
We did have some success in pollution credit and trucking logistics markets though.
Of all the jobs I've had, that was easily the most fun/interesting algorithmically. I got to learn all about LP/MIP solvers, graph decomposition, distributed computation, etc.
Best of luck to you!
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#113Really cool! 20 years ago my first job out of college was with a small company doing combinatorial auctions for the institutional bond market (among other industries). In the end the chicken/egg problem of having enough liquidity was too much to overcome. At one point we pitched the NYSE on doing the opening call as a combinatorial auction but they were not interested. We did have some success in pollution credit and…
A surprising (to us) takeaway was that making a product in this space sound "vanilla"/undifferentiated is a good thing. Once folks aren't concerned about an initial integration being a lift, they're happy to onboard us as "just another trading venue" (but with great story about unique liquidity and match quality). Many then get excited about adopting the lowest hanging fruit incrementally for their specific use cases. And after peeling away a few layers of the onion, they get excited about the future state in which others do the same, and what initially seems like incremental change becomes a market structure transformation.
We studied the history of adoption in other markets where it's gone well (FCC spectrum, display advertising, procurement) and poorly (OptiMark, POSIT4—great attempts, ahead of their time, killed by complexity and subtle mismatches between the mechanism and market participant needs).
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#114How does the expressive bidding interact with NBBO held orders?
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#115Are you expecting to only support institutional investors or retail order flow as well? It seems like this supports pushing the notional to shares conversion all the way down to the exchange, which I can see a use for. How does the expressive bidding interact with NBBO held orders?
We don't segment the market at all or exclude subscribers (beyond requiring that they're FINRA registered BDs), but the way that PFOF works means that we likely won't see retail order flow from the brokers that wholesale it. We do view Smart Markets as a win/win/win/win for retail customers, brokers, market makers, and regulators alike (cleaner routing, better transparency and price formation, better allocative outcomes, lower technology costs).
> How does the expressive bidding interact with NBBO held orders?
https://news.ycombinator.com/item?id=30257586
Expanding on that a bit—we have the standard Rule 611 requirements, meaning that we clear within the NBBO on a symbol by symbol basis. We don't route.
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#116Sounds very interesting -- congrats on making to here, must be super exciting. A couple of questions: How do you deal with best execution obligations for the "legs" of your trades? What market data do you publish about your order book?
> How do you deal with best execution obligations for the "legs" of your trades? Excellent question. Each leg of the trade comes in as an individual limit order with a price/quantity bound on it. This makes it easy for brokers to satisfy their 15c3-5 requirements since Expressive Bidding can only further restrict these limits. We clear the auction with a constraint that bounds the clearing region to the NBBO, snapsho…
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#117Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#118There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc). Market-maker protections can allow outstanding orders to be cancelled if you get filled up to a predetermined risk setting. Most exchanges don't want to add additional complexity and more order types unless there's demand for it, which is presumably how market structure evolved to where it is today.
Combinatorial auctions are very interesting, but what's to stop exchanges from (1) creating more common bundles that people want to trade; (2) matching them with price-time priority so everyone gets a fair price? Wouldn’t the auction model just create wider or locked/crossed markets?
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#119Congrats on the launch! What are the main benefits of this approach compared to creating additional combo (multi-leg) products on existing exchanges? There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc). Market-maker protections can allow outstanding orders to be cancelled if you get filled up to a predetermined risk setting…
Thanks! There are two main differences. For one, combos are (as the name suggests) predefined. That works reasonably well for products like futures and options where the 80/20 approach of making combos for somewhat structural ones like different expiries in the crude and eurodollar complex or packs and bundles designed as standalone financial instruments/hedges. An implied generational liquidity mechanism can knock out some basic structural price arbs between combos, resulting in a combinatorial auction approximation.
This approach falls apart when the combinations are very general as they are in the markets for equities, credit, and many of the assets that trade in the screens.
The CLOB/predefined bundle approach also doesn't address substitutability and non-price factors, and dealing with those is key to unlocking Pareto efficiencies.
> There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc)
The problem with block trading venues and other approaches, e.g., conditionals, boils down to incentives. Initiators of block trades are usually going in the same direction, so opportunities for direct interaction/coincidence of wants are rare. And market makers don't want to take large deltas unless they can hedge and/or know the counterparty. The net effect is not much size getting done. Conditionals are a similar story to blocks. They don't have the opportunity cost that a firm block resting on a venue does, but there's information leakage, and the surface area for interaction is still small. Market makers aren't incentivized to provide liquidity, and directional traders are worried about/behave strategically due to concerns over information leakage.
> what's to stop exchanges from (1) creating more common bundles that people want to trade
I'd say that the market has already done this in the form of ETFs and index products and an entire ecosystem of ETF market making emerged around it.
> (2) matching them with price-time priority so everyone gets a fair price? Wouldn't the auction model just create wider or locked/crossed markets?
I'm not sure that I follow this part entirely. The uniform price combinatorial auction that we're running results in everyone getting the same price on a symbol-by-symbol basis. And, we view time priority as a bad thing (the arms race dynamic of time priority was known to practitioners since markets first started going electronic but Budish et al. were the first to write about it in detail). Periodic auctions have better fairness and post-trade mark outs theoretically and in practice. Some of the European venues where batch auctions have made limited inroads demonstrated this.
Re: Launch HN: OneChronos (YC S16) – Combinatorial auctions market for US equities
#120Congrats on the launch! What are the main benefits of this approach compared to creating additional combo (multi-leg) products on existing exchanges? There are already a lot of mechanisms in traditional markets that deal with revealing or concealing true demand (e.g. block trades, icebergs, etc). Market-maker protections can allow outstanding orders to be cancelled if you get filled up to a predetermined risk setting…
> Congrats on the launch! What are the main benefits of this approach compared to creating additional combo (multi-leg) products on existing exchanges? Thanks! There are two main differences. For one, combos are (as the name suggests) predefined. That works reasonably well for products like futures and options where the 80/20 approach of making combos for somewhat structural ones like different expiries in the crude…
Regarding the last point, let's say hypothetically you create a market for "+100 FB shares, -500 SNAP shares". If everyone is competing on price to quote that combination, that creates the most competitive market. However, if there are many expressive bids with various conditions (e.g. minimum quantities, conditional on execution of another leg, etc), they may not get "implied" into creating a reasonable market, creating exponentially more arbitrage opportunities if they become locked/crossed. This adds a lot more complexity in calculating implied markets and matching them in a sensible way. With price-time priority, I agree that there are downsides as you mentioned, but it makes it easier to ensure the tightest spreads.