The hypes with regard to the SEC set to reveal proposals on “order-by-order” competition (routing retail stock orders to auctions) really got me confused. Is the SEC Chair Gensler really serious about enforcing BestEx, Order Protection and curbing Conflicts of Interest, or is the Agency is SAYING ONE THING BUT DO ANOTHER when faced with industry pressure? Reference to 79 FR 5592, footnote 711 regarding the Dodd-Frank Volcker Rule. It said “The Agencies are not adopting a “transaction-by-transaction” approach because the Agencies are concerned that such an approach would be unduly burdensome or impractical and inconsistent …”
Would Retail Investors have a choice? Would they survive in an Auction market where it is usually crowded with Specialists and Professional players moving blocks? Are they “Dim Sum” for many predators in a tough environment that is not suitable for them to swim in the first place? It is yet to be clarified who is defined as the “Professional” versus “non-Professional”. If someone is only able to play a few “music notes” (individual orders) rather than compose a complete “song” (trade algo), then they deserve appropriate investor protection in our opinion.
On an “order-by-order” basis, there are complications with inferior price to Best Bid and Offer, order size, market timing, thinly traded securities, and whatnot. One cannot review the consistency of patterns based on just a few orders and whatever disclosures that the SEC will require. Hence, the devil is in the details. To better delineate rights and obligations, we counter suggest a Copyright Licensing Mechanism where featured traders and/or algo developers would earn reasonable royalties while subject to liabilities if their trade activities resulted in manipulations or market chaos.
Firms that do not make the cut for exclusive privileges currently enjoyed by the elites, would want to learn of new opportunities to rival the top firms and see how this royalty mechanism can benefit and promote the fair, reasonable and non-discriminatory” (FRAND) principle. Firms heavily invested in algo wheels would find our proposition appealing because: (1) majority of algo wheels become sunk costs when they are no longer in use; why not turn the unused algo into a second profit opportunity; (2) royalty is a stable revenue stream as compared and in addition to the hard-earned trading alpha.
Hypothetically, when you are the featured artist, you get 45%. A trader or algorithm developer should on average be able to compose 12 to 20 new “songs” per annum. Half of the compensation would be off-loaded from their affiliated publisher (broker-dealer) and pay variably by the royalty mechanism. There will be upside to how much these “featured artists” can made under this mechanism if they have hit “songs” that being played many times on different streaming platforms.
For the affiliated publisher (broker-dealer), it gets 50% of the performance royalties. Other non-featured composers get 5%. At the same time, firms need to pay for subscription(s) content published by others. We envisage a typical Broker-Dealer with $26 million in annual revenue would yield up to 25% improvement to the bottom line as a result of earning performance royalties, 2nd profit for unused algo, off-load certain staff costs while incurring minimal royalty’s admin fee, payment for usage of others’ algo IP and subscription for pattern monitoring service.
When a firm is an agency broker, it is considered as the non-featured composer or DJ mixing engineer to get 5%; 95% would be a pass through to the original publisher and their featured artists. In the case of retail, it would be the individual investors whose trades that got executed receive 50%; the remaining 45% will also pass through but the agency broker will have the discretion on its method to divide and allocate the amount to its quote contributors.
[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 firm is a Market-Maker (MM) that internalizes a portion of the order flow, because the MM consumes content, MM will pay royalties for whatever they consumed. For orders that a MM routes to a trading venue, the MM will earn 5% for that portion similar to a non-featured composer or DJ mixing engineer.
If a firm is a dark pool, bilateral, or multilateral trading facility, the firm is considered an interactive streaming platform and is required to pay royalties only to the content that the subscribers choose to have their order flow interact with the subscribed contents. If the firm is a lit exchange, the firm is considered as a non-interactive streaming platform like Cable TV. The firm pays royalties for all content available on their lit venue. For order protection reason, if a venue routes the order to another streaming platform, the order router would be considered as the DJ mixing engineer to get 5%.
The music industry has proven that streamers would be more profitable when music reaches more people. Estimates for top streamers would be on par with what they currently make to ensure a smooth transition to new equilibrium. New opportunities would arise focusing on discovering unknown unknowns. Smart Order Routers, Liquidity Sourcing, Execution Services or Transaction Cost Analyzers are like DJ mixing engineers. In order to earn more royalties above the 5%, they would have to twist some elements to create a new melody in the song (e.g. create an index), thus becoming the featured artists for this new version of the song.
Above is a mockup model using hypothetical percentages for discussion purpose only. Obviously, these percentages and allocation methods are something the industry should collectively discuss, negotiate, and agree upon. We encourage policy makers and all participants in the industry to pull out the calculators and crunch some numbers. We estimate that market data and connectivity is about $4.5 billion a year for US equity and options, transaction rebates is about $6.1 billion, and payment for order flow is another $3.6 billion; added together we are talking about $14+ billion. There are ample of opportunities to put the money into more effective and efficient use – i.e. grow the overall pie by increasing number of diversified market participants and reducing unknowns; weed out any conflicts in the National Market System (NMS); and everyone can get a bigger piece by adopting new innovations and promoting FRAND (fair, reasonable, and non-discriminatory).
Before you turn away to decline this opportunity, listen to these 2 sound clips about plagiarism detection. A few seconds of music would determine the similarity of things, and extrapolate it into patterns, dimensions across assets classes and markets for taxonomy and simulation of market dynamics. Do you want to put faith in rent seekers who profit from adding layers of intermediaries’ costs to the value chain, or would you rather trust our patented invention to revolutionize the market? The Music industry has a proven success that we can all learn from. We look for Needle-Movers to make this “Sound Library” to work. The majority would be followers according to the diffusion of innovations, so we do not need the whole market to come to agreement with this opportunity. Those who choose NOT to have their trade strategies be copyright protected would be at a disadvantage and face potential litigations under the Copyright Laws.
By Kelvin To, Founder and President of Data Boiler Technologies
At Data Boiler, we see big to continuously boil down the essential improvements that fit for your purpose. Between my patented inventions and the wealth of experience of my partner, Peter Martyn, we are about finding rare but high-impact values in controversial matters, straight talk of control flaws, leading innovation and change, creation of viable paths toward sustainable development and economic growth.
By Kelvin To, Founder and President of Data Boiler Technologies
