Communications of the ACM

of the queue, the less likely an order in front of you will cancel (for example, your progression slows).

We often say you get to the front of the queue via two methods: promotion, which is a second-level queue becoming a first-level queue, and joining, which is, exactly as it sounds, joining the newly created queue. Figure 10 illustrates the difference between promotion and joining.

Profit and the big queue. If your order is executed on a large queue, then you have a free option to collect the spread. If one of your orders on the opposite queue is executed, then you collect the difference between the price at which you bought the asset (bid side of $9) and the price at which you sold the asset (offer side of $10).

In the event the queue you were executed on gets too small, you can aggress the order that was behind you. This means crossing the bid/ask spread and forcing a trade to occur. If you get executed passively, you are aggressed upon by another order sitting on a queue. As long as another order is behind you, you can unwind the trade, meaning you can aggress the order behind.

Aggressively unwinding a trade is called scratching the trade. You did not make a spread; you did not lose a spread. It is a zero-sum trade.

exchange technology

An exchange is the collection of sys-
tems that facilitate the electronic ex-
ecution of assets in a centrally con-
trolled and managed service. Today,
exchanges are in a fight to offer faster
and faster trading to their clients, fac-
tio of its queue size versus the opposite
queue (for example, the bid queue size
vs. the ask queue size). Figure 8 shows
this as pUP.

Cancel rates. If trading rates are difficult, cancel rates are even more difficult. The question is, given your place in the queue, what is the probability a cancel will come from in front of you (thereby allowing you to move up)? This is difficult to estimate, but our own trading and some historical data provides the basis for an engineering estimate.

To start, we know that if we are in the back of the queue, the probability of a cancel coming from in front of us is 100%. If we are in the front, it’s 0%.

Figure 9 is a chart of the empirical percentage of time a cancel comes in front of your order; it is subject to whatever percentage of the queue you were in. For example, if you are at 0 on the x- axis, then you are at the very front of the queue, and cancels must come from behind you. The key takeaway is this: