Found in 13 comments on Hacker News
darawk · 2022-02-15 · Original thread
> Thanks for the insight, would appreciate any recommendation on where I can read more about this.

This is sort of the standard textbook on how exchanges and markets work, and has a nice discussion of the tradeoffs inherent in call auctions vs continuous time trading.

If you really want to get deep and are comfortable with math, this paper:

explains the general framework market makers are using to make decisions.

> I'm curious what would attract market makers to this sort of exchange if it exposes them to more risk. Unless they can charge a premium for taking on that risk. Ultimately, market makers are service providers. They are selling liquidity to people, and they get compensated for that. What that means is that they will go wherever their clients go. And they wouldn't necessarily make less money in a higher spread regime, larger spreads mean bigger margins for the MMs. I think they probably would overall make less, because volume would decline so much, but it's just a little more complex than more risk == bad.

> But then why would traders want to pay more when they can get better prices (from tighter spreads) on today's more popular exchanges?

It's a little complicated. I mean, the sort of facile answer is: they wouldn't, and don't. We have a free market, if anyone wanted to they could start one of these up right now.

A slightly better answer is that some clients would prefer it and some wouldn't, and there's a reasonable argument to be made that the ones who would prefer it are more important to healthy market functioning. Specifically, it'd be much better for larger asset managers who research stocks and make careful picks based on rigorous analysis.

Right now, those asset managers, who are the people that really make the markets efficient, are being statistically frontrun by HFTs, both market makers and others. That is, some MM notices someone buying large blocks in a pattern consistent with one of these smart asset managers, and they label this "toxic flow". Backing up slightly, market makers want to sell to dumb money.

Consider a world where the only trades that occur are by "smart money". Someone only trades if they know the stock is going to go up or down, and there is no other trading activity aside from this. In this world, the MMs would make zero money, because they'd be constantly getting "adverse selected". MMs make profits roughly in proportion to the overall quantity of dumb/smart money. They make money when lots of trading happens, but the price doesn't go anywhere.

Getting back to the main thread, MMs are constantly trying to identify "smart money", and when they find that smart money, they either re-center their spread in the direction the smart money is trading, widen their spreads, or stop providing liquidity entirely. Continuous time trading makes it considerably easier to separate smart and dumb money than a batch auction would, and this means that overall these smart managers are making lower profits than they otherwise "should".

The flipside of this though is that these tactics actually improve the price that retail traders get. This is why Citadel buys Robinhood's order flow, and then offers them better prices than the open market does. They can do this because they "know" that all of the Robinhood flow is dumb money, and consequently they can safely tighten their spreads for those users.

gerty · 2020-04-27 · Original thread
This book by Larry Harris helped me understand much better the mechanics and terminology of financial markets.

peller · 2018-10-01 · Original thread
Related, Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris is also excellent.

These aren't really textbooks, but regardless, the Market Wizards series by Jack Schwagger is highly recommended:

PaulHoule · 2018-01-14 · Original thread

for the securities side of the industry and

for banks that take deposits and make loans.

yummyfajitas · 2016-11-16 · Original thread
I have not read "Flash Boys: Not So Fast", so I can't comment on it. I do however recommend completely skipping Flash Boys - it provides almost no new information and a lot of FUD.

If you want an introduction to HFT, I'll shamelessly plug my blog posts which describe the basic mechanics of it:

I also wrote a few posts later on about controversial HFT topics:

My posts probably read more like a "how to program python" tutorial than a compelling Michael Lewis narrative, however.

The book Trading and Exchanges ( ) goes into a lot more detail than my blog, but it costs about $50-$90.

tcoppi · 2016-04-19 · Original thread
Read "Trading and Exchanges: Market Microstructure for Practitioners (

This will give you an idea and maybe whet your appetite about how markets and trading actually work, and all the reasons people use markets. From there you can work towards learning more about actually developing trading strategies more complex than buy and hold.

6502nerdface · 2015-09-14 · Original thread
Arbitrage in general is not a "net negative." It's a net positive, which is why arbitrageurs earn a profit; they are compensated for a service that generates value for someone else.

To quote from Larry Harris' textbook [1]: "Arbitrageurs ensure that prices do not vary much across markets. When prices diverge, they buy in cheaper markets and sell in more expensive markets. The effect of their trading is to connect sellers in cheaper markets to buyers in more expensive markets."

Arbitrageurs effectively "port" liquidity from one market to another. This is the value they provide to others.

Thus I'm not sure I would describe this as arbitrage; or at least it's not the term the GP is looking for.


drpancake · 2014-07-02 · Original thread
Rather heavy reading, but this is probably what you're looking for:
mcphilip · 2013-09-20 · Original thread
>People think it's complicated because of all the FUD (c.f. the comments on this story), but the basic mechanics of how a modern exchange operates are remarkably simple.

I'm referring to market microstructure in terms of the complex interactions amongst exchanges, the impact of Reg NMS, etc. Obviously the underlying algorithms can be boiled down to simple components.

For those interested in learning something about market microstructure, I highly recommend "Trading and Exchanges: Market Microstructure for Practitioners" as an introduction to the basics:

klapinat0r · 2013-02-08 · Original thread
That is true, however it is not why the/a stock market is irrational.

Well, first off, one person asked, the other told, but in your sentiment:

What you refer to is more likely a skew of information, a mix of information traders and (e.g.) value traders, or (generalizing term) noise traders.

There may not be a facit as to "Is this good or bad for the value of AAPL to have dividends paid out in this amount?". There may be different interpretations. Some might feel it's a sign of a new path in dividends payout from Apple even in the future. Some might think it's a short term "stunt" to keep the investors happy. Some might think it makes them less valuable as they have less money, some might think a strategy of catering to profit and investors will outweigh the "loss" in dividend payout.

Just looking at this thread of comments shows there are many interpretations.

If you think this is remotely interesting, I'd suggest reading up on reactions to news, e.g.: (we overstimate the effects of bad news, and underestimate good news) or an easy-to-read intro to financial markets: (it's a big book, but easy to read selectively, and has a few good chapters on market participants that might help explain how the market works).

kevinpet · 2012-12-11 · Original thread
Trading and Exchanges: Market Microstructure for Practitioners. Larry Harris.

This does a really good job of explaining how having people fulfilling different roles viz trader, dealer, investor results in being able to buy and sell whatever you want whenever you want. I wish I could send a copy to everyone who thinks flipping second-hand goods on Craigslist is arbitrage.

JabavuAdams · 2011-10-31 · Original thread
Trading and Exchanges: Market Microstructure for Practitioners.

I'm finding this a more interesting and detailed read than _Capital Markets for Quantitative Professionals_. For instance, the book traces through everything that happens when placing, executing, and settling typical trades.

On the other hand, I've taken the Canadian Securities Course, so perhaps Capital Markets is a better introduction for total beginners.

lrm242 · 2010-06-17 · Original thread
This is a fun game and is very challenging. If you apply yourself you can be successful.

I would highly suggest picking up the book, Trading and Exchanges: Market Microstructure for Practitioners ( by Larry Harris. To trade effectively you need to understand how the markets work and this book provides and outstanding tour through the markets, who participates in them, and why they do or don't make money.

There are innumerable ways to make money in the markets. Long term, short term, technical or fundamental, with retail platforms like Ninja or going very sophisticated and connecting directly to an exchange like NASDAQ using native protocols like ITCH and OUCH. Don't let naysayers distract you from your goal--for every naysayer there is always a counter point.

If you want some motivation, read through this IamA at reddit:

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