Order-by-Order Competition: Alternative to routing retail stock orders to auctions
I’ve been really confused by the hype surrounding the SEC, which is set to unveil proposals on “order-by-order” competition (routing retail stock orders to auctions). Is SEC Chairman Gensler really serious about enforcing BestEx, protecting contracts and containing conflicts of interest, or is the agency saying one thing and another in the face of industry pressures? Reference to 79 FR 5592, footnote 711 regarding the Dodd-Frank-Volcker rule. it said “The agencies are not taking a ‘transaction-wise’ approach because the agencies fear that such an approach would be overly burdensome or impractical and inconsistent…”
Do retail investors have a choice? Would they survive in an auction market where it’s usually packed with specialists and professional players moving blocks? Are they “dim sum” to many predatory fish in a harsh environment unsuitable for them to swim? It still has to be clarified who is defined as “professional” or “non-professional”. In our opinion, anyone who can only play a few “music notes” (individual orders) instead of composing a complete “song” (trade algo) deserves appropriate investor protection.
On an “order-by-order” basis, there are complications with a lower than best bid and offer price, order size, market timing, thinly traded securities, and so on. One cannot verify pattern consistency based on just a few orders and the disclosures required by the SEC. So the devil is in the details. To better delineate rights and obligations, we propose a copyright licensing mechanism where featured traders and/or algo developers would earn reasonable royalties while being held liable if their trading activities result in manipulation or market chaos.
Firms that don’t make the cut for exclusive privileges currently enjoyed by the elite would want to learn about new ways to compete with the top firms and see how this royalty mechanism encourages and encourages what is fair, reasonable and non-discriminatory can” (FRAND) principle. Firms investing heavily in Algo wheels would find our offering attractive because: (1) most Algo wheels become a sunk cost when they are no longer used; why not turn the unused algo into a second chance to win; (2) Royalties are a stable source of income compared to and in addition to hard-earned trading alpha.
If you are the featured artist, hypothetically, you get 45%. A trader or algorithm developer should be able to compose an average of 12 to 20 new “songs” per year. Half of the remuneration would be dumped by their affiliated publisher (broker-dealer) and paid variable through the royalty mechanism. There will be an advantage of how much these “featured artists” can earn with this mechanism when they have hit “songs” played many times on different streaming platforms.
He receives 50% of the performance royalties for the affiliated publisher (broker-dealer). Other composers not featured receive 5%. At the same time, companies have to pay for subscription content published by others. We envision a typical broker-dealer with annual revenue of $26M would see up to a 25% improvement in bottom line as it earns performance royalties, a second win for idle algos, and relieves certain staff costs, while there is a minimal management fee for license fees , payment for the use of others’ Algo IP and subscription to pattern monitoring service.
If a company is an agency broker, it is considered a non-featured composer or DJ mixing engineer to receive 5%; 95% would be passed on to the original publisher and its featured artists. In the case of retail investors, the individual investors whose trades were executed would receive 50%; the remaining 45% is also passed through, but the placement broker, at its discretion, may split the method and allocate the amount to its odds providers.
[Note: It was initially thought that the top 5 contributors to the National Best Bid and Offer (NBBO) would be allocated the remaining 45% for quotes, as a reward mechanism. However, since the SEC has stated multiple NBBOs from the Securities Information Processor (SIP) and different Competing Consolidators (CCs) and Self-Aggregators (SAs) are non-novel and insurmountable, there is no de facto NBBO as an anchoring reference. Whereas Capital Markets Union (CMU) in Europe would have a single near real-time pan-European BBO, so the mechanism can be further fine-tuned in aligning the rewards.]
If a company is a Market Maker (MM) that internalizes part of the order flow, MM pays royalties on everything it consumes because the MM consumes content. For orders that an MM forwards to a trading venue, the MM receives 5% for that share, similar to a composer or DJ mixing engineer without a function.
When a firm is a dark pool, bilateral, or multilateral trading facility, the firm is considered an interactive streaming platform and only has to pay royalties for the content that subscribers choose to have their order flow interact with the subscribed content. If the company is a lighted exchange, the company is considered a non-interactive streaming platform like cable TV. The company pays royalties for all content available on its lighted venue. If a venue routes the order to another streaming platform for order protection reasons, the order router would be considered a DJ mixing engineer, receiving 5%.
The music industry has proven that streamers would be more profitable if music reached more people. Estimates for top streamers would be what they are currently doing to ensure a smooth transition to a new equilibrium. New opportunities would emerge, focused on discovering unknown unknowns. Smart order routers, liquidity sourcing, execution services or transaction cost analyzers are like DJ mixing engineers. To earn more royalties above 5%, they would have to twist some elements to create a new melody in the song (e.g. create an index) and thus become the featured artists for that new version of the song.
Above is a mockup model using hypothetical percentages for discussion purposes only. Obviously these percentages and allocation methods should be discussed, negotiated and agreed upon collectively by the industry. We encourage policy makers and everyone involved in the industry to pull out the calculators and crack some numbers. We estimate that market data and connectivity for US stocks and options is approximately $4.5 billion per year, transaction rebates approximately $6.1 billion, and order flow payments an additional $3.6 billion; together we are talking about over 14 billion US dollars. There are many ways to use the money more effectively and efficiently – ie to increase the overall pie by increasing the number of diversified market participants and reducing unknowns; resolve any conflicts in the National Market System (NMS); and everyone can get a bigger piece by embracing new innovations and promoting FRAND (fair, reasonable and non-discriminatory).
Before you turn away to turn down this opportunity, listen to these 2 plagiarism detection sound clips. A few seconds of music would determine the similarity of things and extrapolate them into patterns, dimensions across asset classes and markets for taxonomy and simulation of market dynamics. Would you like to trust rentseekers to benefit from having the costs added up the value chain by intermediaries, or would you rather trust our patented invention to revolutionize the market? The music industry has a proven track record that we can all learn from. We’re looking for needle movers to get this “sound library” up and running. The majority would be followers due to the spread of innovation, so we don’t need the entire market to agree on this opportunity. Those who choose NOT to copyright their trading strategies would be at a disadvantage and face potential litigation under copyright laws.
Through Kelvin toFounder and President of Data Boiler Technologies
At Data Boiler, we see it as a tall order to continually boil down the essential improvements that fit your purpose. Between my patented inventions and my partner Peter Martyn’s wealth of experience, we’re all about finding rare but highly effective value in controversial matters, direct talk of control failure, leading innovation and change, creating viable pathways to sustainable development and economic growth.
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