Monday, April 11, 2016

The best microstructure example for class I have ever seen

The floor of the New York Stock Exchange.
The floor of the New York Stock Exchange. (Photo credit: Wikipedia)

This is really cool.

So most finance classes traditionally talk about how trading floors worked in the past.  You know the drill: open outcry, specialist, floor brokers, etc.  But trading has changed so much, that armed with that knowledge only one would barely recognize today's marketplace made up of many exchanges, OTC, and darkpools.

This week's Masters In Business Podcast  with Barry Ritholtz had the Keith Ross the CEO of PDQ on.  It was very enlightening.  They have a great model and it deserves to be shown in classes.

What do they do?

Instead of operating like a "normal" High-Frequency friendly exchange, they slow things down (milliseconds are a big deal in this space) and while waiting, pings other accounts for their quotes.  THIS IS KEY: they do not say if buying or selling, nor the size of order.  So they then get back the quotes from everyone and essentially have recreated the old specialists' book.  The customer then gets the best price.  This, in my mind, is pure genius.  Well worth listening to the podcast.

You can also read about PDQ here:

About PDQ ATS | PDQ ATS: "PDQ’s pioneering equity auction products were developed with a singular purpose – to provide a more effective market structure for all participants. As an independent equity market where modern technology benefits all, PDQ uniquely solves today’s market issues by putting control back in the hands of the trader and fostering competition to provide best prices among liquidity providers. When trading at PDQ, there is a short pause after entering an order. During the pause, liquidity seekers initiate an anonymous, symbol-only solicitation of trade responses from participating liquidity providers. The responses are aggregated and matched to the initial order in an auction framework that offers improved pricing opportunities and virtually eliminates gaming and spoofing."

Here is more with a picture that might explain it better:,_Inc.

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