Jamie's Big Idea

I wrote this fictional short story in 2010 when it was first published in the Mondo Visione World Handbook of Stock Exchanges.


At the time there was consternation and speculation on the causes of the May 6, 2010 Flash Crash. On this day the Dow Jones Industrial Average plunged 9%, only to recover the losses within minutes.


This was one of several similar incidents, and pundits were beginning to ask whether fast and aggressive computerized trading was contributing to market instability, and increased speculative trading at the expense of ordinary investors.


The story unpacks some of the issues involved with fast trading, and describes, in a slightly tongue in cheek way, an Exchange trading system designed specifically to accommodate passive large in size trading styles favored by traditional buy and hold investors.


Exchange designs have since been developed that incorporate some of the features muted in the fictional story, such as measures to avoid timing advantages obtained by colocation, alternatives to price/size/time execution priority, and the use of randomized periodic auctions.


For example the IEX Alternative Trading System that launched in the U.S. in October 2013 is designed and promoted by traditional investors to avoid fast speculative trading styles. The system executes orders in price - Broker (Agency / Riskless Principal then Principal) – time priority rather than the price/time priority order matching approach widely used by Exchanges. The system also has a feature to slow down trading. It introduces 350 microseconds of latency for any order action taken by a participant (enter, cancel, revise an order). This ensures the IEX Matching Engine has sufficient time to receive and process changes to the National Best Bid/ Best Offer (NBBO) before a fast participant can receive and act upon the change on IEX.  This acts as a deterrent to so called Flash Traders.


Another good example of an innovative approach to matching large blocks of trades is the Block Discovery™ feature of the Turquoise Alternative Trading Platform majority owned by the London Stock Exchange Group. Announced in October this year by Turquoise CEO, Robert Barnes, the feature matches large blocks of trades and then sends the deal via a randomized auction service, which works like a sealed bid. Larger blocks are given priority. The auction tends to last between 5-45 seconds and discourages high-speed traders.


If you enjoy Jamie’s Big Idea, you may want to checkout an earlier title called “Jamie the Prospector” which is also in the Apple iBooks Store.