Sharks, Minnows & The Other Half Of US Equities
Inside the mind of an institutional equities broker
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“It's pretty confusing, right? Does it make you feel bored? Or stupid? Well, it's supposed to. Wall Street loves to use confusing terms to make you think only they can do what they do. Or even better, for you just to leave them the f*** alone.”
-Jared Vennett (played by Ryan Gosling), The Big Short
As many of you already know, the US equities market has for many years been a tale of two halves - the classic world of exchanges like the NYSE, Nasdaq & CBOE, and the off-exchange world of wholesalers & dark pools led by firms like Citadel Securities. The latter half has been what media outlets have covered to the point of exhaustion - the retail order lifecycle, the potential conflicts of interest involved, the gamification, the competition (or supposed lack thereof). Given the amount of fanfare around the off-exchange part of US equities, you’d think it was the only way they were traded. What about the other half - the on exchange, largely institutional side of US equities market structure?
The public doesn’t normally hear or care much about the intricacies of institutional equity trading. This isn’t surprising - most institutions don’t talk much about how they interact with the markets, how they compete, or how they best serve clients. Why would they? Ryan Gosling said it best - they just want you to leave them alone.
Amid this longstanding truth, we’re left to assess the curious case of Proof Trading, an upstart institutional equities broker that bucks this secrecy trend and then some. Via a long series of Medium & company blog posts, Proof shares everything about its technical setup, ongoing operations & trading strategy - and I mean everything. I’ve never seen so much transparency from a firm in Proof’s position as an institution involved in the weeds of US equities.
Why play with an open book in such an opaque industry? In their own words:
“We believe the single biggest problem with this industry is the ubiquitous opacity. Conflicts of interest and harmful practices flourish in the shadows — and we’re not just talking about harmful trading practices. Our wish is to be an example that transparency can still be a sound business strategy and hopefully nudge this industry in the right direction, one step at a time.”
(Source)
In this post I want to review Proof’s deep library of published research & use it to describe the unique tactics & challenges of institutional equities trading. The on-exchange side of US equities has for many years been described as the “sharky” side, where HFT firms lie in wait ready to pick off stale orders, trade around whales like pension funds & exploit an increasingly fragmented market at the expense of customers who use systems like Proof Trading. Proof’s public work helps us understand how institutions navigate the US equities market to avoid the sharks & give their clients the best possible prices.
We’ll begin with a simple, step-by-step breakdown of the institutional order lifecycle as it makes its way from the end user, through Proof Trading’s system & into the market: