Dumb finance question thread of the day - I'm going to try & explain how IEX's D-Limit order works below. For those who know more than me, please tell me if I'm close to right or completely off-base. Thanks in advance:
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Imagine the market for Tesla exists like below on the lit stock exchanges. Limit orders of varying amounts & prices rest on the order books of each exchange. NYSE has the "best" bid of $1,000 at the time.pic.twitter.com/VODCfnYLKT
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Now imagine a Big Buyer wants to buy 100 shares of TSLA. It will first buy the 30 shares at NYSE at $1,000, then the 50 Nasdaq shares at $1,001 and the 10 BATS shares at $1,003. Big Buyer has now pushed prices up by $3 and needs 10 more shares to complete its order.pic.twitter.com/AcxWVqdYJg
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Before Big Buyer can get the last 10 shares, an HFT firm buys the shares before anyone else & sells to Big Buyer at $1,006. The HFT firm now has $1 of riskless profit & Big Buyer paid $1 more for its shares. This is called "latency arbitrage"pic.twitter.com/JPYUdvwg4A
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In comes IEX's D-Limit order type. IEX sees the market for TSLA moving up & trips its "crumbling quote" signal, which automatically re-prices its 10 shares from $1,005 to $1,006 so HFT firm can't profit from them. Big Buyer completes its order & still pays $1,006.pic.twitter.com/gqJMIXV97q
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Upside of D-Limit Order: - prevents HFT firm from profiting off latency arbitrage Downside of D-Limit Order: - doesn't really lower costs for Big Buyer which is goal in the first place
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Is this right? Am I dumb? How would you describe the D-Limit Order? I appreciate any & all feedback.
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End of conversation
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NO. The HFT's would have orders on all 3 exchanges and as soon as they sold 1 share on NYSE they would kill or cfo higher their offers on the other 2 exchanges to see how big the buy order is and what the limit price is.
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