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SEC set to propose rules that would squeeze stock-market middlemen

wsj.com

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Re: SEC set to propose rules that would squeeze stock-market middlemen

#131
post #89

Earlier quoted context omitted.

Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. If there is a catastrophe, the regulator can cancel the day's trading. T+2 would be an improvement, but less than that would create new problems. Something the US could do to improve its situation would be to change from end of day novation to novation within five seconds of a trade. This might reduce the amount of…

>Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. Why is this a good thing? There are consequences to actions, lets just live with that. If you mistakenly order something you didn't mean to the solution isn't to "catch the error" and prevent a transaction from happening, the solution is to make an new entry/transaction that reverses the previous one. If you end u…

> There should be no settling, no clearing, every transaction should be immediate and final.

I hear they're trying this idea on something called the "Blockchain" and that it's all going really well.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#132

Earlier quoted context omitted.

Pretty much. "Robinhood makes money in a number of ways, notably through a system known as payment for order flow. That is, Robinhood routes its users' orders through a market maker who actually makes the trades and compensates Robinhood for the business at a rate of a fraction of a cent per share." [0] The market maker is usually a big player like Citadel. And with this information, they can front-run the market. [0…

They have to execute at or better than the national best bid and offer so you are getting at or better than the price you'd get if you posted a marketable order to an exchange. I don't see how they are front-running.

How do you enforce that? The retail investors are not aware of that and they have no way to compare at the point of trade. If they grease enough palms in the government they are free to do what ever they want

Re: SEC set to propose rules that would squeeze stock-market middlemen

#133
post #131

Earlier quoted context omitted.

>Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. Why is this a good thing? There are consequences to actions, lets just live with that. If you mistakenly order something you didn't mean to the solution isn't to "catch the error" and prevent a transaction from happening, the solution is to make an new entry/transaction that reverses the previous one. If you end u…

> There should be no settling, no clearing, every transaction should be immediate and final. I hear they're trying this idea on something called the "Blockchain" and that it's all going really well.

The reason blockchain isn't doing well has absolutely nothing to do with there being "no settling, no clearing, every transaction should be immediate and final." and everything to do with the "assets" that the blockchain represents.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#134

Earlier quoted context omitted.

HN comments (laypeople in general) tend to make very confident and very wrong comments on market structure

> HN comments (laypeople in general) tend to make very confident and very wrong comments on {X} Yes, it's annoying. From conspiracy theorists to supposedly smart people with PhD's, I'll catch them in a fiction. "You just made all of that up," I'll say, to which they reply with handwaving and equivocation. Why are we so reticent to be comfortable with our own ignorance and hold our tongue?

No post body was provided.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#135
post #89

Earlier quoted context omitted.

Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. If there is a catastrophe, the regulator can cancel the day's trading. T+2 would be an improvement, but less than that would create new problems. Something the US could do to improve its situation would be to change from end of day novation to novation within five seconds of a trade. This might reduce the amount of…

>Multi-day settlement is good for market stability. If there is an error, it gets picked up in clearing. Why is this a good thing? There are consequences to actions, lets just live with that. If you mistakenly order something you didn't mean to the solution isn't to "catch the error" and prevent a transaction from happening, the solution is to make an new entry/transaction that reverses the previous one. If you end u…

I agree that fat finger trades should stick.

That is not what clearing and settlement are about. They are about liquidity and stability. In countries with well designed systems, equities settlement is an atomic action.

So, for a transaction involving a UK stock, the Bank of England moves money from one party to the other, and stock from the second party to the first as an atomic transaction.

Trading flows get complex. Some illustrations,

1. If your balance sheet is smaller than a global investment bank, you are regarded as higher risk to deal with. A clearing house won't onboard you on your own account. Instead, you have to get a kind of coverage from a major player who the clearing house does respect, at a cost to you, to clear against their balance sheet. The exchange membership might be yours, and the trades are yours, but for clearing and settlement you are represented by an IB who has a desk that specialises in covering trading risk for scrappy trading firms for a tidy profit.

2. Most participants in markets are not direct members - e.g. hedge funds and mutual funds tend not to be. Non-member access the market via a broker who is a market. Often a broker will outsource activity for some markets to another participant who is more effective at accessing a particular market.

You will have noticed that these arrangements create long chains of inter-dependencies. If there was only trading and settlement, a small error at one bank would cause a cascade effect that would affect hundreds of other participants and disrupt atomic settlement. The system would quickly and regularly stall. So between trading and settlement there is a round of "clearing". Here, everyone confirms that the details are right ahead of settlement. If a participant failed to send a transaction from their trading engine to their clearing system, that would be revealed. If a market maker closed the previous day with a short position they weren't supposed to have, they would get assistance to patch that up. There is lots of forgiveness and room for correction within the clearing round, but big-stick consequences if you don’t come to the right conclusions before it has closed. In this way, when the Bank of England goes to move positions, everyone ends up with what should have.

This three-tier trading/clearing/settlement model allows entities to focus on types of risk that they are good at managing. Without them, the exchange would have to do it all (this is not realistic), there could be no activity between jurisdictions (e.g. french bank trading on swiss market) and it would be far harder to bring liquidity to market.

A system with fewer layers would be far riskier. The clearing houses act as a buffer if there is an insolvent participant. According to legend, when Lehmans was in collapse, the risk process at London Clearing House kicked in to unwind their positions and made a profit on that unwind. This mechanism reduces the possibility for contagion.

If a country tried to build a system that had less liquidity or worse stability, companies would move from that jurisdiction to another that suited them better. I am not sure of the details but understand Sweden blew up its finance sector through vindictive/populist legislation in the late nineties. Activity moved to London and the world moved on.

Clearing needs to be a day because if there are misalignments, you will need analysis and developers to have time to review what happened on the trading day, and have phone calls to discuss with teams at their other partners until a problem is uncovered. If this failed, the senior management would get involved on the T+1 evening. Hence, T+2 settlement is the optimal.

24/7 markets. Someone who wanted to build a trading desk would need to ensure coverage from risk and compliance officers, and to be on top of market events. With a traditional open/close market, it is feasible to do this with a single team. With a 24/7 market, you can't so you either miss liquidity, or are forced to put together an expensive, complicated global team for no increase in total trading opportunity. And on the exchange side, 24/7 makes the software far more complicated for no benefit beyond the bragging rights.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#136

Earlier quoted context omitted.

Assuming that you are interested in crypto, did you know that the vast majority of crypto trades happen in dark pools?

Assuming you mean OTC desks, because there isn't much proper dark pool presence in crypto. OTC desks aren’t where majority of spot and delta one products trade although some of their advertising might have you think otherwise.

A dark pool is just a private transaction between two people. So every crypto txn not on an exchange is a dark pool onto itself

Re: SEC set to propose rules that would squeeze stock-market middlemen

#137
If it were up to me, I'd make the market a series of batch executions, every 30 seconds... 20 seconds of open for orders, 5 seconds to actually compute the transactions, and 5 seconds to send out the results, and then repeat.

Completely eliminate the idea of high frequency frontrunning.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#138

Earlier quoted context omitted.

What does truth searching mean, that’s an interesting term.

HN comments (laypeople in general) tend to make very confident and very wrong comments on market structure

This is a property of human beings in general. We're all wrong about almost everything, and "wrong and confident" probably just means the same thing as "wrong".

Re: SEC set to propose rules that would squeeze stock-market middlemen

#139
post #131

Earlier quoted context omitted.

> There should be no settling, no clearing, every transaction should be immediate and final. I hear they're trying this idea on something called the "Blockchain" and that it's all going really well.

The reason blockchain isn't doing well has absolutely nothing to do with there being "no settling, no clearing, every transaction should be immediate and final." and everything to do with the "assets" that the blockchain represents.

When cryptocurrency exchanges get "hacked" that is end of the exchange and nobody can get their cryptocurrency back.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#140
post #138

Earlier quoted context omitted.

HN comments (laypeople in general) tend to make very confident and very wrong comments on market structure

This is a property of human beings in general. We're all wrong about almost everything, and "wrong and confident" probably just means the same thing as "wrong".

Which is fine! But as community we do have a somewhat annoying tic of fixating on a small set of axioms and trying to extrapolate everything else from them, when a lot of things you can just look up the answers. Even competing authorities, if our cites conflict, is usually a more interesting (and curious!) conversation than a bunch of nerds making it up as they go along.

When nobody has a cite, we're just going to noodle and be wrong about stuff and that's fine, even salutary. But sometimes the truth-seeking we do is kind of superfluous.

(I'm just writing this so it doesn't sound like I was just snarking about HN.)

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