High‐Frequency Trading and the New Stock Market: Sense And Nonsense

The stock market has been transformed during the last 25 years. Human suppliers of liquidity like the NASDAQ dealers and NYSE specialists have been replaced by algorithmic market making; stocks that once traded on a single venue now trade across twelve exchanges and a multitude of alternative trading systems. New venues like dark pools, and new participants like high‐frequency traders, have emerged to take on prominent roles. This new market has had more than its share of controversy and regulatory scrutiny, particularly in the wake of Michael Lewis’s bestseller Flash Boys. In this article, the authors analyze five of the most controversial new market practices, including various high‐frequency trading strategies and dark pool activities. They set out a simple conceptual framework based on adverse selection and agency problems, and apply that framework to assess the welfare effects of each of the five practices. While much that is criticized is indeed objectionable, other controversial practices are much more complex than popularly imagined and may in fact be socially desirable. They conclude by evaluating a range of potential reforms to equity market structure

High‐Frequency Trading and the New Stock Market: Sense And Nonsense

Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/142455/1/jacf12260.pd

Strategic experimentation in queues

We analyze the social and private learning at the symmetric equilibria of a queueing game with strategic experimentation. An infinite sequence of agents arrive at a server which processes them at an unknown rate. The number of agents served at each date is either: a geometric random variable in the good state, or zero in the bad state. The queue lengthens with each new arrival and shortens if the agents are served or choose to quit the queue. Agents can only observe the evolution of the queue after they arrive; they, therefore, solve a strategic experimentation problem when deciding how long to wait to learn about the probability of service. The agents, in addition, benefit from an informational externality by observing the length of the queue and the actions of other agents. They also incur a negative payoff externality, as those at the front of the queue delay the service of those at the back. We solve for the long-run equilibrium behavior of this queue and show there are typically mass exits from the queue, even if the server is in the good state

Design of Consumer Participative Device for Smart Grid Initiative

This paper will discuss about design of consumerparticipative device for smart grid initiative. Indonesia conditionis taken as the case, because smart grid initiative will depend onobject and environment condition. It is found that electricityprovider has difficulties to provide Advance MeteringInfrastructure (AMI), and that will be the area where consumermost probably be able to contribute for smart grid. As consumerdevice, it should be designed to give additional benefits forconsumer at affordable cost. Functionality requirements of thedevice for customer benefits are mapped. A smart meteringdevice is designed and proposed, which has capability to collectdata and report to electricity provider via IP network, withoutinterfering existing provider's traditional meter. It is based on alow cost microcontroller with GSM/GPRS communicationcapability and optional autoswitch function to alternative sourceof energy. The experiment is done by making the deviceprototype. It shows that customer benefits and cost constraintcan be achieved with proper design of the device, to make feasiblethis consumer participative device concept for smart gridinitiative

Linux vs. Windows: A comparison of application and platform innovation incentives for open source and proprietary software platforms+

The paper analyzes and compares the investment incentives of platform and application developers for Linux and Windows. We find that the level of investment in applications is larger when the operating system is open source rather than proprietary. The comparison of the levels of investment in the operating systems depends, among others, on reputation effects and the number of developers. The paper also develops a short case study comparing Windows and Linux and identifies new directions for open source software research.

Design of Consumer Participative Device for Smart Grid Initiative

This paper will discuss about design of consumerparticipative device for smart grid initiative. Indonesia conditionis taken as the case, because smart grid initiative will depend onobject and environment condition. It is found that electricityprovider has difficulties to provide Advance MeteringInfrastructure (AMI), and that will be the area where consumermost probably be able to contribute for smart grid. As consumerdevice, it should be designed to give additional benefits forconsumer at affordable cost. Functionality requirements of thedevice for customer benefits are mapped. A smart meteringdevice is designed and proposed, which has capability to collectdata and report to electricity provider via IP network, withoutinterfering existing provider’s traditional meter. It is based on alow cost microcontroller with GSM/GPRS communicationcapability and optional autoswitch function to alternative sourceof energy. The experiment is done by making the deviceprototype. It shows that customer benefits and cost constraintcan be achieved with proper design of the device, to make feasiblethis consumer participative device concept for smart gridinitiative

The New Stock Market: Sense and Nonsense

How stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded on up to sixty competing venues where a computer matches incoming orders. High-frequency traders (HFTs) post the majority of quotes and are the preponderant source of liquidity in the new market. Many practices associated with the new stock market are highly controversial, as illustrated by the public furor following the publication of Michael Lewis’s book Flash Boys. Critics say that HFTs use their speed in discovering changes in the market and in altering their orders to take advantage of other traders. Dark pools – off-exchange trading venues that promise to keep the orders sent to them secret and to restrict the parties allowed to trade – are accused of operating in ways that injure many traders. Brokers are said to mishandle customer orders in an effort to maximize the payments they receive for sending trading venues their customers’ orders, rather than delivering best execution. In this Article, we set out a simple, but powerful, conceptual framework for analyzing the new stock market. The framework is built upon three basic concepts: adverse selection, the principal-agent problem, and a multivenue trading system. We illustrate the utility of this framework by analyzing the new market’s eight most controversial practices. The effects of each practice are evaluated in terms of the multiple social goals served by equity-trading markets. We ultimately conclude that there is no emergency requiring immediate, poorly considered action. Some reforms proposed by critics, however, are clearly desirable. Other proposed reforms involve a trade-off between two or more valuable social goals. In these cases, whether a reform is desirable may be unclear, but a better understanding of the trade-off involved enables a more informed choice and suggests areas in which further empirical research would be useful. Finally, still other proposed reforms are based on misunderstandings of the market or of the social impacts of a practice and should be avoided

Linux vs. Windows: A Comparison of Application and PlatformInnovationIncentives for Open Source and Proprietary Software Platforms

The chapter analyzes and compares the investment incentives of platform and application developers for Linux and Windows. We find that the level of investment in applications is larger when the operating system is open source rather than proprietary. The comparison of the levels of investment in the operating systems depends, among others, on reputation effects and the number of developers. The chapter also develops a short case study comparing Windows and Linux and identifies new directions for open source software research