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:
The closer your order gets to the front
figure 11 . Gaming the gateway.
Client A
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Client B
Client A
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Client A
Client B
Client A
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Client A
Client B
figure 12. matching engine.
1,000 Shares: Client 1
Resting Queue
2,000 Shares: Client 2
3,000 Shares: Client 3
1,000 Shares: Client 4
1,000 Shares: Client 5
1,000 Shares: Client 1
1,000 Shares: Client 6
1,000 Shares: Client 7
1,000 Shares: Client 8
Orde
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1,000 Shares: Client 1
Client requests 10,000 Shares
2,000 Shares: Client 2
3,000 Shares: Client 3
1,000 Shares: Client 4
1,000 Shares: Client 5
1,000 Shares: Client 1
1,000 Shares: Client 6
1,000 Shares: Client 7
1,000 Shares: Client 8
Or
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1,000 Shares: Client 1
Exchange Engine searches down
until it finds 10,000 shares.
2,000 Shares: Client 2
3,000 Shares: Client 3
1,000 Shares: Client 4
1,000 Shares: Client 5
1,000 Shares: Client 1
1,000 Shares: Client 6
1,000 Shares: Client 7
1,000 Shares: Client 8
Or
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, al
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1,000 Shares: Client 1
Clients are put on
an outbound message queue
(to alert they have traded)
2,000 Shares: Client 2
3,000 Shares: Client 3
1,000 Shares: Client 4
1,000 Shares: Client 5
1,000 Shares: Client 1
1,000 Shares: Client 6
1,000 Shares: Client 7
1,000 Shares: Client 8
Orde
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of
f
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s
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Resting executing orders
are popped off the queue and
all participants are notified
1,000 Shares: Client 7
1,000 Shares: Client 8
Orde
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