🚨 David Lauer AMA Transcript/Summary 🚨
========================================

| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/Bye_Triangle](https://www.reddit.com/user/Bye_Triangle/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/n7234n/david_lauer_ama_transcriptsummary/) | 

---

[Education 👨‍🏫 | Data 🔢](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22Education%20%F0%9F%91%A8%E2%80%8D%F0%9F%8F%AB%20%7C%20Data%20%F0%9F%94%A2%22&restrict_sr=1)

[![r/Superstonk - 🚨 David Lauer AMA Transcript/Summary 🚨](https://preview.redd.it/xaq1w5qjwpx61.jpg?width=1432&format=pjpg&auto=webp&s=3141218d0b49a8d4c781c933b50e6162983aa942)](https://preview.redd.it/xaq1w5qjwpx61.jpg?width=1432&format=pjpg&auto=webp&s=3141218d0b49a8d4c781c933b50e6162983aa942)

______________________________________________________________________

Bravo, Bravo, Amazing work!

An enormous thank you to both of our wonderful AMA participants. We cannot fully express our gratitude for taking the time to do this. So again, thank you!

👏🎉 [u/dlauer](https://www.reddit.com/u/dlauer/) and [u/Jsmar18](https://www.reddit.com/u/Jsmar18/) 🎉👏

Today's stream marks the second [r/SuperStonk](https://www.reddit.com/r/SuperStonk/) LIVE AMA, and what an AMA it was... WOW. With these AMAs we have a few goals:

1.To get more eyes on this situation and the blatant corruption within.

2.To have relevant experts look through our findings with a critical eye, in turn helping us refine our theories.

3.To get guidance from those who have relevant expertise while providing educational content to help bring more wrinkles to our brains.

4.To help legitimize this community. Dispelling the falsehood that we are "Dumb Money"

It is becoming more and more clear that we are making real progress towards change. Not only did Dr.T say this, but Dave Lauer did as well. Our power is in keeping the popular attention towards the issues that we are seeing in our markets. So, if you haven't already, reach out to your members of Congress explaining the issues, reach out to your local NASAA representative, reach out to the SEC, even writing DD helps...

Just make your voice heard in whatever way you know how. Also, to that point, ensure that you participate in the Proxy Vote if you want GameStop to hear your voice.

📺Don't touch that remote!📺 Stay tuned for our Live AMA next week. On Wednesday, (May 12 at 4 PM EDT) We will be hosting a renowned Proxy Shareholder rights expert, recommended by Dr.T herself, Carl Hagberg! More details to follow soon. ______________________________________________________________________

INTRO - DAVE LAUER'S BACKGROUND

-   Jack

    -   Welcome, everyone. So we have our second AMA today, I'm [u/Jsmar18](https://www.reddit.com/u/Jsmar18/), but you can call me Jack.

    -   I'm here with Dave Lauer, who has some seriously impressive, wide-reaching knowledge. So let's welcome him to the stream.

-   Dave Lauer

    -   Hi

-   Jack

    -   Thanks for joining us today. So we will be covering a really wide range of topics based on some of the questions that have been submitted.

    -   So, we've got everything from the High-Frequency Trading, Dark Pools Payment for order flow, and more.

    -   We have an action-packed hour, so, grab a cup of tea. Settle yourself in, and get going.

    -   To start off, people aren't going to know your experiences, can you just give us a rundown of your history in the US financial markets and some of your history as well. (?)

-   Dave Lauer

    -   Sure, Jack, thanks and thanks to everyone for tuning in. It's very exciting that there's interest and attention in this space where there usually isn't that much.

    -   So, my career was primarily technology-focused. I worked at a startup in New York, building extremely high-performance data routing systems, called Middleware systems.

    -   It turned out at the time, around '05 to '09, the firms that were most interested in that kind of technology, were these firms called "High-Frequency Trading" firms. Not many people have heard of them, and it was also a pretty interesting time of transition for US markets as reg NMS was adopted and then implemented.

    -   After doing that for a few years, I saw what was going on on the HFT side of things and said, *"Geez These guys are making a lot of money."* So I got the opportunity to join one of those firms-- you might have heard of them, a *small* trading firm out in Chicago called Citadel. A friend of mine was going there to start a new trading desk and asked me to come with them. I did.

    -   I moved from New York to Chicago with my wife, and after less than a year at Citadel, (without getting into the details) as a trading desk, we left. We went to another HFT firm called Allston trading. Which was actually a smaller firm, and I worked there for almost two years. Then, I left, as I've mentioned before, in 2011, which was a year after the flash crash.

    -   After trying to get involved in making markets better, not really succeeding. So, I had really intended on leaving finance at that point, almost exactly 10 years ago. I didn't like the industry.

    -   I built a storytelling website called [CowBird.com](http://cowbird.com/) , which is still online, with a friend of mine. On the site, I told the story of why I left high-frequency trading, someone from NPR heard it and asked me to come on this program called Marketplace.

    -   So I did that and it was pretty cool. Suddenly, people were really interested in talking to me; like the Senate, the SEC, and some guys in New York who were starting a new stock exchange. I kind of got sucked back in, through no real intention on my part. I found that I could do things on the other side, and maybe help institutions with better exchange design or better regulation and legislative design. Then I started also working for asset managers, so for the last 10 years, until about two years ago, I really just consulted and worked on my own.

    -   I worked with IEX in the earliest days when the exchange was being designed and built as an ATS. I worked doing quantitative analysis for asset managers looking at how their brokers were using reporter routing algorithms to navigate this incredibly complex market structure.

    -   I learned of the term market structure which I hadn't known before, which was apparently what I knew, is a very niche space to study.

    -   I've sort of seen all sorts of different parts of the market ecosystem from high frequency to exchanges, to large broker-dealers, to institutional asset managers, helping them with the best execution.

    -   I've learned a lot about retail and how that pipeline works. And I've worked with regulators and Congress to help them understand better how modern electronic markets work. For the last couple of years, I've really focused on artificial intelligence which was more of an interest of mine, and really not specifically in finance but sometimes

TL:DR 🦍 Summary:

-   Dave Lauer has an incredible amount of experience when it comes to HFT systems having spent many years building them, then many years operating them, it is safe to say he is an expert.

-   Dave no longer sees these systems as beneficial for the markets, seeing firsthand what damage they can cause.

-   Following his time in-and-around High-Frequency Trading, Dave went on to try and step away from the industry, only to get "sucked back in" a soon after.

-   Now, Dave Lauer works towards trying to improve the markets, even going on to talk about having a seat on the FINRA Market Regulation Committee

______________________________________________________________________

"OPENED MY EYES"

-   Jack

    -   That's interesting, that you left mainly based on ethical reasons.

    -   What about your ethics actually made you decide to leave after the flash crashes?

-   Dave Lauer

    -   Well, I went into high-frequency with maybe a naive romantic notion:

        -   *This is how you can make markets work, this is the lubricant on the gears of capitalism.*

    -   If you're a believer in capitalism, which I was, and to a certain extent still am, you believe in that type of philosophy. It felt that this was a somewhat noble pursuit and was also very lucrative so it worked really well in that way.

    -   The flash crash kind of opened my eyes to this idea that maybe the speed of technology and the incentives in the markets were making things a bit more fragile, rather than more stable and resilient. It seemed like when things worked really well when they worked well but when they're put under stress they really fall apart.

    -   I found that kind of disturbing...

    -   A little bit after the flash crash, the CEO of the firm came out and he asked for anyone who had any ideas regarding new regulations or thoughts on the markets. He said "we're going to be getting involved, you're gonna have to lobby and do this, so let me know if you have any ideas"

    -   I went to him with this whole thing I had written up. Saying, "here are the things I think we should change about markets, and even though it might affect our profitability in the short term, in the long run, it's best for markets and therefore, best for the firm"... he *literally* laughed me out of his office... It's not a joke... I think that was when I realized that it just wasn't for me.

______________________________________________________________________

FINRA

-   Jack

    -   It's really interesting... So, I noticed you're currently on FINRA's market regulation committee, is that right?

-   Dave Lauer

    -   Yeah.

-   Jack

    -   So, I'm interested in-- y'know, we know a bit about the SEC. They've been very tight-lipped in regards to the GME incident and all the other meme stocks, but what kind of role does the FINRA Market regulation committee actually play, in an advisory capacity, for the market?

-   Dave Lauer

-   So, it is an advisory committee, it's not like it has any actual authority per se. There are some things that have to go through the committee before they can be proposed for public rulemaking.

-   It's just an opportunity to be in front of the people at FINRA, who are policing markets, who regulate markets, who deal with enforcement, who are studying markets.

-   I like it as an experience, I think it's quite fascinating, and the way the committee is structured, there are industry members who are broker-dealers so FINRA is an organization that is funded by the broker-dealers and regulates broker-dealers. That's all FINRA does, it does not regulate managers or anyone else just the broker-dealers.

-   You have industry members and then non-industry, and I'm considered non-industry or independent. We meet three times a year, generally, we talk about new potential rulemaking concerns from the FINRA staff that they want to get our opinion on.

-   If there are things happening, you can be sure that those things will come up. It's confidential what happens at the committee, so I can't talk specifically...

but the last couple of meetings have been *pretty interesting* 👀

-   I am not one to hold back or even be guarded about what I say because I don't care. It doesn't really affect me. I don't make or lose money in any way from anything that happens in there, so I usually just tell them what I'm thinking.

-   You can see that there are other members of the committee, the industry members or broker-dealers (whose names you would recognize), they generally feel very differently from me and it can lead to some, some *good conversation.*

-   Jack

    -   No surprise there...

    -   So, one of the actual purposes of the committee is advising on the short sales, as well as trading practices. It might not be your area of expertise, but I think we'd be interested as a community, to understand,

    -   what is your actual view on the GME situation as a whole? Maybe when it took off in late January...

-   Dave Lauer

    -   Yeah, Jack, like I was saying to you just earlier: I actually went on TV on the BBC to talk about the Gamestop situation, which was the first time I've been on live TV and the first time I had been on TV in quite a while... and If I'm on TV you know things are going weird or wrong. It's not like people call me up when things are going well.

    -   GameStop has been fascinating from the perspective of the sort of traditional parts of the industry, which I tend to be tapped into. I've talked to lots of asset managers, I talked to other market structure experts and aficionados. It's been really incredible to see it.

    -   At first, it seemed like it was just some kind of crazy retail blip, but, I think, over the last year since the pandemic started, we really started to see this structural change in markets with increased retail participation. I think in many ways it is a very good thing.

    -   But in some ways, I'm very concerned. I'm very concerned about the way that these apps are structured, the way that they incentivize overtrading, I think that's a big problem.

    -   I think people who have not seen a market crash, have no sort of understanding of what that can be like.

    -   To clarify, I am not trying to comment in any way, on what the value of Gamestop is, I have no idea. If I had thought I did, I've been proven wrong time and again**.** That's not what I know. I am not a fundamental analyst or even a technical analyst or anything like that.

    -   In terms of the way that the markets have handled it, it's been very interesting to see some of the changes that have taken place.

    -   I do think that-- you mentioned short selling, and I think that short selling is a huge concern in markets now. I believe that short selling is important for well-functioning markets. But predatory short selling or Naked Shorting is a huge concern.

    -   One thing I didn't mention in my intro, I've been doing some analysis of market manipulation using public market data.

    -   There's no doubt that we see really significant manipulation in different stocks at different times, and I can't get into detail but some of the theorized reasons behind it are definitely around naked shorting, or the idea that shares are being re-hypothecated and re-hypothecated, over and over again, lent out and lent out to create far more available shares in the market than the actual float. This is why you can see numbers where you have more than 100% short interest in certain names.

    -   I'm very concerned about FTDs, and ways of manipulating FTD statistics. I think that there is something to some of the posts that I've seen on Reddit, that have looked at the options market and tried to understand whether that is a way of covering up fails. It's actually an analysis that I'm very interested in and may look into myself.

TLDR 🦍 Summary:

-   Concerns over naked shorting are not just isolated to GME, there are concerns of this across many stocks.

-   Lending credence to our theories over the manipulation of the Short Interest Data through the options market.

-   Dave subtly mentions that through his research of public data he has seen significant manipulation in different stocks. Could not elaborate further though.

______________________________________________________________________

SEC

-   Dave Lauer:

-   I really do think that these are concerns that regulators care about as well.

-   I don't want to make it out that regulators are just not paying any attention, but, it can also be overwhelming when you look at the level of technology and data and complexity to try and regulate these kinds of markets.

-   Jack

    -   Yeah, that's interesting. At least from my perspective, it feels like the SEC, (from a regulatory perspective) is moving kind of slow in the past decade. When it comes to their response to high-frequency trading or dark pools... they have a lag, in terms of when something becomes popular and when they take action into it.

    -   The influx of retail in 2020 during the pandemic, and then an even larger influx at the beginning of 2021-- do you think the SEC was actually ready for this to happen? Can we expect any material changes in the future that would be in response to retail? Something to help put us an equal platform, of sorts

-   Dave Lauer

    -   I don't think anyone expected this, this shift in retail.

    -   I sit on a Stock Exchange Board in Canada. We've seen very similar things happen in Canada, but in Canada, retail order flow is on exchange.

[![r/Superstonk - 🚨 David Lauer AMA Transcript/Summary 🚨](https://preview.redd.it/0yjzk5xqxpx61.jpg?width=1912&format=pjpg&auto=webp&s=76594f500ba199de30cd5635c72044f451bb1a8d)](https://preview.redd.it/0yjzk5xqxpx61.jpg?width=1912&format=pjpg&auto=webp&s=76594f500ba199de30cd5635c72044f451bb1a8d)

🎶Oh Canada🎶

-   Dave Lauer

    -   So that's a big difference between Canada and the US. In the US, even though retail has exploded, that volume has stayed off-exchange.

    -   And so, was the SEC ready? I don't think so.

    -   They don't move quickly, if there's anything that I can tell you-- It doesn't mean that they're being incompetent, or deliberately dragging their feet. They're a government regulator and they move extremely slowly and it's been extremely frustrating for me.

    -   When I testified before Congress nine years ago, I set out what I felt were extremely non-controversial ideas for improving markets and increasing transparency. I presented them to the SEC, that same year, and most of them didn't get done.

    -   One of my ideas took six or seven years to get in place, stuff that nobody would really have disagreed with, in terms of transparency. So, it's just the nature of things, it's very frustrating.

    -   But I think that there are some promising signs:

        -   Gary Gensler coming in as chair of the FCC is promising. He seems to be enforcement-minded, we'll have to see. We've sort of been here before.

        -   The level of popular attention is incredibly important,

    -   If there's something that people can take away from this, it's how can you make a difference or get involved. If you keep attention on these issues, and you keep the SEC and your members of congress aware of your interest. That's the kind of thing that could make them move quicker, and they do respond when there's attention on issues and especially popular attention.

TLDR 🦍 Summary:

-   Government regulators move at a snail's pace. This isn't because they are corrupt necessarily, but rather this is the way of things with regards to the bureaucracy of government.

-   Gary Gensler coming in as chair is promising, as he seems to be regulation-minded which is exactly what we need right now.

-   The way to make this stuff move quicker is to keep the spotlight on it. Keep doing what we are doing.

____________________________________________________

THE RACE TO ZERO LATENCY

-   Jack

    -   Let's move on to one of the more popular topics, which you talk about, And that is high-frequency trading.

    -   So, back in 2012 in a statement to the SEC roundtable on technology, you basically stated that technology has moved so quickly that most market participants have not been able to keep up.

    -   Moving into 2021 do you still have that same reception, or is it changed?

-   Dave Lauer:

    -   Yeah, I think so... perhaps even more so. I don't think most people understand what the impact of technology on markets has been. It has increased complexity, dramatically.

    -   I think, because, you have rules and regulations that were for a different era, and most of the current rules and regulations were really set up before electronic trading was as pervasive as it is today.

    -   So, I think that regulators have really struggled to keep up. And even when they've been able to get on top of issues, they've generally done it from a very simplistic perspective, a very linear way of thinking

    -   When you're regulating complex systems and complex markets you need to understand complexity theory and non-linear theory, that's not something that regulators understand.

    -   You often see attempts of top-down regulation versus trying to shift incentives, bottom-up and then let the market kind of play out. So I think that the current way that retail trading works-- which is that it all goes to a wholesaler such as Citadel or virtue, that all of that volume is internalized. is an example of something that existed before technology. It probably made sense at that point, but technology has moved along so much that still having that system in place doesn't make nearly as much sense at this point.

    -   Because of that, I think it's leading to worse outcomes for the entire market. By keeping that kind of volume off-exchange.

-   Jack

    -   I think one of the important topics surrounds volatility as a whole and how High-Frequency Trading has kind of contributed to that.

    -   The SEC, recognizes that, since the mid-2000s, we've witnessed average trade sizes drop, the market has been fragmented further, and this is all accompanied by a rise in volatility.

    -   So from 2010 to 2013. It was 40% higher in terms of volatility compared to 2004 to 2006. That pretty easily correlates with the increase in high-frequency trading.

    -   So my question is, on the volatility front, does high-frequency trading promote volatility? And if so, how does it actually promote that volatility?

-   Dave Lauer:

    -   You can find studies that go both ways, you will find people that can cite studies that show that it has not increased volatility, and you can find the other side. Often, that can depend on your definition of volatility, first of all.

I think that high-frequency trading in many ways can exacerbate extreme moves. Here, I'll show one slide. I've got some things, that from time to time might make sense for me to show, let me throw this one up.

[![r/Superstonk - 🚨 David Lauer AMA Transcript/Summary 🚨](https://preview.redd.it/d4gu1y0vxpx61.jpg?width=3835&format=pjpg&auto=webp&s=e1dd3fc6d894a2b27b1b09f30b2c8fd466375976)](https://preview.redd.it/d4gu1y0vxpx61.jpg?width=3835&format=pjpg&auto=webp&s=e1dd3fc6d894a2b27b1b09f30b2c8fd466375976)

-   So, here, this is, sort of, the history of High Frequency Trading. It focuses on what are called illiquidity contagions or flash crashes. You can see that these are four dramatic events.

    -   The Cable Crash

    -   Here, the Treasury yield crash in, I think, October '05

    -   The flash crash, obviously, 2010

    -   And another, a Euro response,

-   You see these in certain isolated incidents throughout the years, but then you see them happening to individual names even more frequently.

-   When we talk about... "Are regulators up to the challenge?" The response to the flash crash, and to other sorts of these illiquidity contagions were to Institute 'limit up, limit down' rules similar to the futures market. My concern with that has always been that it's more of like a band-aid you're treating the symptom rather than the cause.

-   so these things get a little complex, there's a lot going on when you think of the way that markets function, And the way that markets have evolved to need or to incentivize high-speed trading, and, and to really create this "Race to Zero Latency"

-   Latency requirements and competition over latency have increased over the last fifteen years, in terms of high-frequency trading that's really since like 2005.

-   Which was actually when I started in the industry, *not taking any blame for that.* What happens when you only have 10 microseconds for your software to make a decision on whether it wants to place an order in the market or cancel an order in the market. You don't have a lot of time for complex logic or even risk checks.

-   What happens is the markets and the trading strategies that are profitable start to look more and more like each other. It's called self-similarity.

-   when that happens, you crowd out other trading strategies, and that's part of the problem as well with off-exchange trading. When trading happens in an internalization system, or in a dark pool, It has to have traded between the national best bid and offer (NBBO).

TLDR 🦍 Summary:

-   The markets still employ archaic principles that made sense years ago, but now simply hold us back from having the best outcomes that we could achieve.

-   high-frequency trading in many ways can exacerbate extreme moves

-   Latency requirements and competition over latency has increased over the last fifteen years - we are talking microseconds for transactions

______________________________________________________________________

NATIONAL BEST BID/ OFFER (NBBO)

-   Dave Lauer

    -   Someone had asked on one of the threads, "what's the national best bid and offer?"

[![r/Superstonk - 🚨 David Lauer AMA Transcript/Summary 🚨](https://preview.redd.it/pm53lz8aypx61.jpg?width=3840&format=pjpg&auto=webp&s=3350fcc25855324a515d9e6f4163176d412e5cd6)](https://preview.redd.it/pm53lz8aypx61.jpg?width=3840&format=pjpg&auto=webp&s=3350fcc25855324a515d9e6f4163176d412e5cd6)

-   This is just a quick diagram that shows quotes in the market. Here we've got NYSE, Nasdaq, BATS, and Edge, and each of them has different bids and offers

-   The security information processor is the market data system for the industry. It aggregates all that up. If it says 'well the best bid is on edge, the best offer on NYSE so the NBBO is '02 by '05.

-   That's the CIP is the public data feed exchanges, exchanges also have private data feeds. These are faster, show more information, and high-frequency firms all consume it.

-   What happens here is that there are *lit exchanges*

    -   NASDAQ

    -   NYSE

    -   BATS

    -   IEX

-   These are lit exchanges, and that's what a market is, that's where you get price discovery. *what's something worth.*

-   What something is worth is important to that company because that's where they can raise money-- valuations mean something and they're important, right? That's what public markets are supposed to do, figure out what something is worth.

-   When you have these lit exchanges, providing a mechanism for price discovery, but then in dark pools and off-exchange trading, you're trading within the NBBO you are free-riding off that lit quote. You're taking advantage of it.

-   In Canada, in the UK, in Australia, this kind of setup where trades go to someone like Citadel or Virtu is illegal.

-   That they don't allow it to happen because it can damage the lit market.

-   it can disincentivize market makers. That's in fact what I think we're seeing, market makers that are disincentivized to post orders or post *aggressive* orders because they know if I post the best bid well then Citadel or Virtue is just going to execute an order based on my price, and I'm not going to get to see it, so why should I improve the bid, Right?

-   so that pushes people out of markets. It incentivizes speed, or it incentivizes having captive order flow like Citadel or Virtue you have with all of this retail order flow.

-   I think it's very problematic and it leads to self-similarity. And that does make markets more fragile because we incentivize speed and we incentivize captive order flow, and it leads to exchanges, being the very last destination.

TLDR 🦍 Summary:

-   Markets are designed to help us figure out what something is worth monetarily, and the NBBO helps with that price discovery.

-   Lit exchanges (NASDAQ, NYSE, IEX) are where you get price discovery (what is the stock worth)

-   Dark pools / off-exchange trading (NBBO) just ride off the lit quote but don't affect it

-   In Canada, in the UK, in Australia, this kind of setup where trades go to someone like Citadel or Virtu is illegal because it can DAMAGE THE MARKET

______________________________________________________________________

THE WEB

-   Dave Lauer

    -   So here's another example. This is what markets look like:

[![r/Superstonk - 🚨 David Lauer AMA Transcript/Summary 🚨](https://preview.redd.it/yxxghmmqypx61.jpg?width=3840&format=pjpg&auto=webp&s=9ac73a5f10a97aaeffa3109d25d5f77a72965350)](https://preview.redd.it/yxxghmmqypx61.jpg?width=3840&format=pjpg&auto=webp&s=9ac73a5f10a97aaeffa3109d25d5f77a72965350)

-   Dave Lauer

    -   It's nothing like what people have traditionally thought markets look like right?

    -   You can imagine that when a broker-dealer gets an order, they're going to be sending that order to all of these dark pools at all of these different places, And the last place they send that order is to an exchange, because the exchanges are ended up being the most expensive, and the fewest orders get there.

    -   They end up being called "Toxic Venues" or "Toxic Exhaust Venues" this is what our exchanges have turned into.

    -   That is very problematic.

    -   Our markets exist for two reasons: They exist for price discovery and they exist for capital formation, and it means that we've really messed up the price discovery mechanism.

-   Jack

    -   You touched on an interesting point, you say it's more expensive to actually go direct to the exchange, relative to going to a dark-pools.

    -   Wouldn't it be in the NYSE's best interest to actually incentivize going directly to their exchange, instead of being routed through a dark pool?

-   Dave

    -   It would... If the NYSE wasn't wrapped up in a prisoner's dilemma.

    -   To briefly get into game theory. Basically, there is a regulation in US markets, called the access fee cap.

    -   It says that you cannot charge someone more than 30 mils per share, to buy or sell something on an exchange.

    -   30 mils per share means 30 cents per 100 share so that is a regulatorily imposed access fee cap, it's essentially regulatory price fixing.

    -   It was put in place when Reg NMS was, which was finally passed in '05 and implemented in '07

    -   it was basically *'we see charging 30 cents per 100 so that's going to be the new cap'* and it has not been adjusted, since then.

    -   What that has led to is every exchange competing over rebates. They want to pay people (other firms) as much as they can to post orders on the exchange.

    -   They'll get very close to that access fee cap with their rebates, which means that the access fees that they charge for liquidity taking orders. you receive a rebate on most exchanges, if you post an order, and you pay a fee If you take liquidity.

    -   So every exchange charged this 30 mils per 100. Now you as I think Reddit has learned IEX is not one of those. IEX is what is called a 'Take-Take' Venue. 8 cents per 100 shares on either side.

    -   Whereas, NYSE, NASDAQ, etc. the big market share exchanges, are Maker-Takers.

    -   That is, you get paid a rebate to provide liquidity and you get charged a fee to take liquidity. The exchanges have struggled to reduce costs, because if they reduce the fees that they charge they also have to reduce the rebates that they pay. As long as another exchange is willing to pay a very high rebate, keeping their access fee cap higher, it's the prisoner's dilemma.

    -   This is not like a controversial thing, everyone has recognized this problem.

    -   There have been attempts to implement a pilot for example. *The Trading Fee--* or *The Access Fee Pilot*, which then the exchanges turn around and they challenge in court.

    -   They have actually sued the SEC for trying to change this, because the SEC wasn't going to apply it to payment for order flow. All of these issues are completely entangled. This is... a complex system

    -   You can't simply pull on a string in one part of the system without understanding that there are going to be unintended consequences that ripple through the rest of the system.

-   Jack

    -   An example of the rebates... the NYSE has a program called Supplemental Liquidity Providers.

    -   Is that what you're talking about?

-   Dave Lauer

    -   Yeah, that's right, exactly.

TLDR 🦍 Summary:

-   The market is an incredibly complicated, interconnected web of different exchanges

-   it's more expensive to actually go direct to the exchange, relative to going to a dark-pool. Labeling exchanges "Toxic Venues"

-   This is due to access fees:

    -   A fee cap of 30 cents per 100 shares was implemented in 2007

    -   This has led to exchanges competing over rebates

    -   However IEX does not charge this, they charge only 8 cents per 100 shares on either side (buy and sell)

    -   Access fee cap hasn't changed is forever, leading to exchanges fighting over 'rebates'

______________________________________________________________________

SHOCKING, RAMPANT MANIPULATION

-   Jack

    -   We'll move on to some of the more manipulative practices that high-frequency trading is associated with.

    -   In the early days of the GME saga, post-January squeeze, there was a lot of talk about what Reddit calls "Short Ladder Attacks", essentially it is our way of describing the stock's price being manipulated down slowly with low volume, essentially mimicking organic price movement.

    -   We came to this conclusion through observing level two, order book data, of some really bizarre block trading.

    -   Lots being traded back and forth, below bid/ask prices.

    -   So to me, that sounds eerily similar to wash-trading. I know it's illegal, but is it feasible that these methods still exist, and are being used to actively manipulate markets?

-   Dave Lauer

    -   Yes. Without a doubt. It is unfortunate.

    -   Like I told you before, I've been starting to look at market data, what you call "Level Two order books", you can get the historical depth of book market data which is:

        -   every single order

        -   trade

        -   order modification

    -   ...in the market. I've used it to work with institutional asset managers to help them understand what their transaction costs are for example, but recently we started to look at it, and look for market manipulation... it's there, and it's sort of *shockingly* rampant.

    -   I cannot say a ton about that, but what I have seen is not good...

    -   It's surprising because regulators are supposed to be looking for this kind of thing, but their systems struggle with the amount of data, the complexity of the data, the timestamp issues, these have all issues for a while.

    -   FINRA has gotten better and better. I think that if manipulation is taking place and it's obvious like you've described it, they'll find it...

    -   You just tend not to see the repercussions of it, right?

    -   like it's not always an action that gets publicized, it can often be just a fine that gets lumped in with other fines because those same firms did a bunch of other things.

TL:DR 🦍 Summary:

-   Price manipulation through 'short ladder attacks' or wash-trading is still being actively used and it is RAMPANT.

-   The sheer volume of data on a daily basis helps hide these tactics.

______________________________________________________________________

SPOOFING AND LAYERING

-   Dave

    -   I think that spoofing and layering in markets is a big problem.

    -   I can say that just from the experience of constantly looking at market data for those patterns and seeing them relatively regularly.

-   Jack

    -   Can you please expand on spoofing and layering for those that don't understand what those are?

-   Dave

    -   Sure. So, you were talking about looking at the level two order book which is, as I explained before, the best bid, and the best offer.

    -   The bid is the highest price someone's willing to pay for something, the best offer is the lowest price someone's willing to sell it for, and that's the spread between the bid and offer.

    -   The trades will happen, but above that offer, you can have at each price level a certain amount of volume that someone is willing to transact so as that price gets higher, you can imagine more and more people are willing to sell and as the price gets lower, more and more people are willing to buy. That's what makes an order book.

-   Dave

    -   So what spoofing is, so you can know, the way a high-frequency trading system is calculating a micro price for example is the *attempt*.

    -   So say if the high-frequency system says, OK, I think that GME is worth $180 right now, and it's being bid at $179.80; I can say well I'm gonna improve that bid right as I think it's worth $180.

    -   So I'm going to put a bid out there at $179.85 because I want people to sell it to me, and I want to buy because I think it's going to go up to $180.

    -   And I think it's going to happen very quickly so I'm only going to have to hold that inventory for a few minutes before it ticks up a couple of ticks, and as it does I'm gonna have my offers in there at $180 and as it ticks up it's just going to lay off into that, and I'm going to end up flat because most HFT systems want to be flat and they do not want to take on inventory, they are operating over very tight time horizons, milliseconds seconds, maybe even minutes but that's a very long time.

-   Jack

    -   Yeah

-   Dave

    -   Now, if I know that okay that's how an HFT system works and I know it calculates a $180 micro price (because it looked at all the bids in the market), and it seems there are a lot more bids than offers; I can put some bids in there that are not at the best bid so I don't have as much risk of being executed on these orders, *but I could put a huge number of shares a couple of price levels down and create the appearance of demand*.

    -   That's going to make these automated systems *think there is demand*, so they're going to move up but what I'm really trying to do is actually sell, so I'm trying to push the price up into my sell orders as a manipulator or a spoofer. So that's what the spoofing is; layering is relatively similar.

TL:DR 🦍 Summary:

-   An 'order book' is essentially a collection of the highest prices someone will pay to buy, and the lowest prices someone will sell for security.

-   Depending on volume, if the price rises, more will sell and if it lowers, more will buy.

-   'Spoofing' starts when an HFT speculates the price will rise above the current 'lit' price.

-   The speculation is that this price rise will happen very quickly, and HFT trading systems *rarely* hold onto inventory even for minutes, but more commonly milliseconds.

-   To sum up, where an HFT strategy determines the price will increase, 'spoofing' is the act of creating artificial 'demand' to essentially *trick* these HFT systems into thinking there is demand and they will then buy a stock en masse.

-   This in turn drives up the price as the other HFT take the artificial demand as a buy signal, to the point the spoofers sell price is reached, which allows them to sell at a favorable price for a profit. (*Writer's edit: Even the bots can be manipulated*)

Part 2:
