Monthly Archives: August 2014

The best stock exchange – pitch black

Imagine a wall. This wall represents the market for a particular stock, TSLA.

On one side buyers on the other side sellers.

On top of this wall is a crier who announces the bid and offer prices of TSLA after every exchange of shares between a seller and a buyer. The crier announces ONLY the these two prices, not the size of the transaction or the open requests quantities to buy or sell.

On the buy side investors who want to own TSLA walk up to the wall and present their bid to buy.

On the sell side investors who want to sell TSLA walk up to the wall and present their offer to sell.

Neither side knows who is on the other side, nor how much the other side is attempting to transact. Additionally, none of the buyers know how much the other buyers are trying to buy, nor the sellers how much the other sellers are trying to sell.

The wall is completely opaque aside from the two pieces of information – the current bid and offer of TSLA.

 

Now imagine buyer Bob who want to buy 100,000 shares of TSLA. They walk up to the wall and submit their order to buy. The current offer price of TSLA is $500.00. Buyer Bob has indicated he will only pay $500.00 for TSLA. There are currently only 10,000 shares available at the offer of $500.00 and so buyer Bob gets 10,000 filled of his order. Buyer Bob stands at the wall with his remaining order to buy 490,000 shares.

There were three sellers on the sell side who were offering to sell TSLA at $500.00, one for 5000, one for 3000 and one for 2000 shares. All three of these sellers sold and walked away from the wall.

The TSLA wall crier now announces “Bid $499.99, offer $500.01.”

Buyer Bill now walks up to the wall with his market order to buy 5000 TSLA. Bill has heard the offer of $500.01 and expects that price (or worse). There are 2000 to sell at $500.01 and 20000 to sell at $500.02. As buyer Bill submitted a market order he gets his full 5000 shares but at two different prices.

The TLSA wall crier announces “Bid $499.99, offer $500.02”

Seller Sal now wants to sell 500,000 shares of TSLA as the price has risen to his take profit level. Seller Sal walks up to the wall and submits an offer to sell 500,000 at $500.01.

The TSLA crier announces “Bid $499.99, offer $500.01”

Buyer Bob, still standing there with his outstanding 490k to buy decides to change his mind and up his bid to buy to $500.01.

Bob and Sal, without knowing who either are immediately transact 490,000 shares at $500.01.

Buyer Bob walks away with his now 500k shares and Seller Sal has decided to walk away too, pulling with him the remaining 10,000 shares he offered at $500.01.

The TSLA crier announces “Bid $499.99, offer $500.02”

And so it goes.

No matter who you are, what quantity you want to buy or sell, you can walk up to the wall, knowing the current bid and offer price and get a fair deal.

Nobody can game you as nobody knows how much you are buying or selling.
Nobody can game the TSLA wall using volume as nobody knows how much quantity is being transacted.
The wall does not announce any kind of order book so scalpers can’t jump in on the quote.

Every exchange must become a dark pool with fixed payment for order flow.

 

 

 


Trader Sex Change

It took a while but my library finally got me a copy of Flash Boys – Michael Lewis. And I finished reading it yesterday.

While reading, I did not pause long enough to understand when Lewis explained why they didn’t name their exchange what they wanted to name it.

Now as I type it into a browser window I see their concern…

TradersExchange.com

Trader Sex Change.com

~~~~~~~~

While reading I came to realize why the markets are so screwed up. Not just screwed up but built, not to promote investors in their pursuit to financially join public corporations in their drive for product and service excellence, but built to game the whole shebang. Built to service traders.

The first obvious problem is the orderbook. The fact that it is exposed at all.

The second is the reporting of anything but price on transactions.

Imagine a grocery store.

Outside this grocery customers stand around and every now and then walk up to a chalkboard and write down their intention to buy a number of avocados. Sometimes they walk up and erase their prior intent. Other customers attempt to walk into the store to buy avocados. But before they get through the door they are accosted by this first group and asked “how many avocados are you going to buy and do you know what price you want to buy them?”

“What?” says this last customer.

“Just tell us,” says the group.

“OK, OK, um, 10 and I’d like to pay nothing more than a dollar apiece.”

“Good” say’s the group, “wait right here,” while one one of them runs in, buys 10 avocados for $0.99 apiece and runs out and sells the last customer 10 avocados for $1.00 each.

“Hey, thanks!” says this customer.

“No. Thank YOU!” say’s the group.

The orderbook is still necessary. It’s part of the matching engine inside each exchange. But exposing it only benefits one class of people – traders.

Fortunately dark pools eliminate this ability. Or at least I think it was their intent to do this. All of the exchanges should be dark pools with no alternate “pay-per-view” windows into their activity.

~~~

Imagine this same grocery store again.

This time this same group is sitting outside the grocery story and stopping each customer when they exit the store.

“How many avocados did you buy?”

“What?” says the customer, “what business is it of yours how many avocados I bought?”

“Just tell us the answer!”

“OK, OK, 10, jeeze — now leave me alone alright!”

“Guys, he just bought 10 avocados! Hardly anybody buys 10 avocados in a bunch like that. Something must be up!”

They all run in and try and buy up all the avocados. The price goes through the roof. The original customer comes back in an hour and tries to buy some more because he miscalculated the size of his party and a dozen more people showed up. But now the price of avocados is 3 times what it was an hour ago. But he really needs the avocados and he sees a bunch of people sitting outside the store with sacks of avocados.

“Did you buy all the avocados?”

“Maybe. You need some?”

“Yes, but I’m not paying $3.00 each for them.”

“Well, OK, we’ll sell them for $2.00 then.”

“Jeeze, what a ripoff. FINE! Sell me 5 more.”

This is bizarre – but this is how the markets work.

If the group of people outside the store only knew the PRICE that someone paid for their avocados, that is one thing. That says ‘avocados are worth this $ much.’ Maybe the price goes up a little maybe it drops, depending on what the supply was inside the store. But exposing the quantity of purchases to everyone outside the story only goes to promote gamesmanship. By knowing the quantity traders game the system, becoming extraneous middlemen where not extra middlemen need exist. Traders obviously are NOT investors. They’re not going to make guacamole. They just want to grift investors a few pennies. They just want to add friction costs to the system.

I fucking hate traders.


Share buybacks and increased dividends

Whatever you do Corporate America, make sure you reward your shareholders above and beyond your employees. Because it’s those shareholders who will stand by you when bad times come. It’s the shareholders who are loyal and trustworthy and deserve the fruits of your labor. Your employees? They’re just grist for your revenue mill. Grind them up as you go as you can always replace them. I applaud public ownership of corporations as this give us wealthy our ability to earn without the burden of responsibility. I am an upstanding rentier and usury agent and I stand and cheer your continued dedication to the escalation of my wealth at the expense of the working middle and working poor of this nation. Carry on!


Mobile computing platform – MCP

Single purpose personal digital mobility components.

Examples of existing components:
Exercise bands and dongles
Bluetooth headsets
Smartwatches
Google Glass
Heart/health monitors
Dashcams and LifeLoop type video recorders (police clip-ons and GoPro)

The smartphone ‘size’ escalation will continue until we abandon using smartphones as hand held units, holding brick sized computers to our face, and we adopt mobile computing platforms that provide for the base-station style personal networking to dominate.

At this time we will leverage the computing power, extended radio connectivity and storage of nextgen mobile computing platforms — MCPs. MCPs will begin to replace desktops and laptops and augment tablets and TVPCs. These MCPs will become Cloud extenders whereby their always on, always connected systems will form more of an extended cloud rather than satellite units plugged into the cloud.

Your MCP may contain embedded screens for interaction and media viewing, but more substantially perform as you system of choice for all computing needs. You would be able to allow your MCP to securely connect to any local proximity modules and interact, be they screens, cameras, audio, environment sensors, personal sensors, computing augmentation systems or networks. Your MCP will become your primary system, carried with you always and represent your digital self to the world.

Imagine carrying IBM’s Watson around in your pocket. A Watson connected at all times to the Cloud and at all times providing you awareness of your condition, the conditions of the world around you and supporting services and information you may need on demand. Your MCP will be your base computing station for wireless plug-in from all the peripherals that the world will produce to augment, enhance and protect your life.

Into your MCP you will connect:

• Biofeedback and skin sensors for monitoring heart health, diabetes, blood chemistry, and disease detection; any of which will allow select recipients to receive real time notification of traumatic changes in your physical self. Your MCP will save your life.

• Visual/audio recording systems – VARS: cameras and video recorders of any size and capacity. Such VARS will be worn like watches or pendants or clips. They will be button sized or shoulder/helmet mounted sized. They will be mounted in eyeglasses and ball caps the backs of automobiles. They will be essentially lenses, tiny or macro zoom sized with CCDs and gigabandwidth radios built in to stream their VA content into your MCP. Feedback will of course be provided real time into any number of visual display components – VDCs. These will be virtual eyeglass screens, armband flexible screens, watchscreens, direct retinal displays, or you will be able to broadcast your VARS output to local screens, for instance your TV, you friends screens, TV screens in airports, etc.

• Environment sensors and environment information delivery agents will auto-connect to your MCP providing you with real time temperature, weather, pollution, traffic, and situational emergency type notifications. The broadcast of supporting sensor information will feed into your MCP and give you a gestalt of the world around you in a continuous fashion.

• Digital data from the expanding internet of things will feed directly into your MCP. You’ll be able to receive messaging and notification from:
1. garden sensors to remind you to water your garden.
2. pet sensors to remind you to feed/walk/water your pets.
3. proximity sensors to alert you when people approach your home.
4. mailbox sensors (You’ve got Mail), home utility machine sensors (dryer/washer), resource use sensors (nat.gas water and electricity usage monitors).
• Your MCP will be use on the job to automatically monitor inventory of shelf goods, proximity and power levels of forklifts and material handling vehicles, stress and fatigue and activity levels of employees or fellow workers.

• Your mobile computing platform will become an extension of yourself. You will use it in place of any home computer you may own. Your MCP will connect automatically with screens you normally use to view computer media and web content.

• Your MCP will charge as you move, will charge from induction tables in your home or in local shops and businesses. Charge through solar cells attached to the device or through existing plugin power outlets.

The smartphone of today will evolve into the portable super computer of tomorrow. The MCP will supplant all personal computing systems and eliminate bulky computing platforms of old.

The mobile computing platform will be our representative agents in the future cloud.