With regards to market structure that does not favour speed, I believe the current market structure is already built this way with the execution priority given first to price, second to volume and third to speed although I stand to be corrected. At least open-book order-matching system like Island operated that way.
Almost all exchanges are operating on price-time priority meaning price first then time. Volume is not typically considered. Given that most trades happen in a 1 cent spread, it is not actually possible to compete on price, so all there is left is time. HFT heaven.
Second the aim for fair dealing for retail order is not necessary to always have it absolutely matched against another retail order; it's just to have that order matched with the best price with the highest volume of it in the shortest time, i.e. best execution possible, period.
The "shortest time" is inconsistent with a human centric definition of best execution that is relevant to retail. As a human you cannot really tell the difference between your order being executed in 1 microsecond or 1 second, even though the latter is 1,000,000 times as long as the former. You will definitely pay more for this "better execution" though.
It doesn't really matter whether the order was matched by another MM, another institution, hedge fund or another retail trader on the other side. The problem with PFOF is the lack of exposure of the order to the market hence the potential for the order not receiving the best execution because of the lack of competition.
Mostly Agree. However matching liquidity takers with eachother when possible will always reduce total cost to liquidity takers as a group because competition will never drive the liquidity provider's price down to zero.
The Auction system might have solved the lack of competition problem but it might maintain another problem with PFOF: loss of anonymity and exposure of position to the opposing side. With the PFOF, pretty much all of the retail traders' orders are executed by the wholesalers, our positions, the volume of our trades at which price points are open book to them. They pay for our orders so they know exactly where our stop orders are, our tp orders are and which price our orders are entered. Those are all information of retail orders that are supposed to be private that otherwise could potentially allow retail traders to be taken advantage of but now are all exposed for all to use under PFOF. I dunno how the auction system is going to be set up but the same loss of anonymity would arise if only retail orders are being auctioned off.
You're right it depends on how the auctions would be implemented, but if you look at how auctions typically work on existing exchanges, the order book is completely hidden from the participants. Seems reasonable to assume that would also be the case here.
If institutional orders can remain anonymous, so should retail orders. And in fact all orders should be indistinguishable from each other and that's why I feel retail orders should be sent directly to the exchanges from the trader's device of trading, bypassing the broker.
I don't understand why is it so hard to just have everybody's orders sent to central exchanges to be matched with other orders. It had been done before.
So your solution is to straight-up ban PFOF and replace it with nothing.
As I said before I think this would largely result in shift of profits from wholesalers to HFTs (many of which are actually the same entities). I agree it would probably be an improvement, but not as much of an improvement as the auctions system. That's because the current market structure is such that you can't compete against HFT unless you are HFT. Auctions enable competition much more effectively.
Personally I think an ideal market structure would be having
all orders from everyone going into centralized auctions. It's a pipe dream right now as it would mean putting all the exchanges out of business. But creating a retail only auction system could work, and over time this could eventually morph into central auctions for all. Could this be the SEC's real endgame?
And I actually don't agree with the banning of the rebate system. In order to encourage order volume, paying rebates for limit orders is actually a good idea. And I don't agree that it's difficult to curtail HFT. All you have to do is implement a threshold of minimum latency. Yes HFT is the result of the advancement of technology but it doesn't mean that it should be allowed to be used if it affects fair dealing negatively in a marketplace. I mean atomic bomb is also the result of the advancement of technology but do we allow its usage?
I won't get into rebates since that's a whole other big topic. What do you mean by "implement a threshold of minimum latency" ? I doubt it's that simple, but I'm curious if you've thought deeply on this. I've seen a lot of people opine on this and their solutions usually have all kinds of loop holes where speed still ends up being advantaged.
