I can’t speak. I can’t breathe. I am verklempt! One month ago we issued our Call for a Moratorium on new US Equity Exchange Approvals: Our Damned Call For A Dagnabit Moratorium on August 17th. We issued our Moratorium request, hoping that the regulators would hold off approving new exchanges until they understood our current market structure (see diagram below).

Now, we are used to being ignored. Competitors, customers, sales prospects, spouses, children, family pets, and do-not-call-list-violators-marketing-call-guys all routinely ignore us. This is why this time we thought we would insure that our regulators would at least not ignore us. We not only placed our Call on our website, and emailed it to a few of our closest friends, we even printed out copies of it and placed them in Chinese Food Menus, and hired a guy to go over on bike, lock up in front of 100 F street, and slide them under every office door. Foolproof, right? We thought so. Alas, here we are. Saddened. On a Monday no less. They ignored us too.

Late Friday, it was announced that the SEC had given its approval and blessing to Nasdaq, for their launching of its third exchange, PSX. See here: WSJ: PSX Gets Approval. The exchange will utilize a Price/Size priority model, intended to lure participants with rebates to commit capital and display more size. PSX will charge 13 mils to take liquidity, and rebate you 20 mils for providing it. This contrasts with the regular Nasdaq Book, where HFT’s get rebated 29 mils or 29.5 mils, for adding liquidity and charged 30 mils for taking it. Now if you want to use Nasdaq’s BX exchange, the one that is inverted, Nasdaq will rebate you 3 mils for taking liquidity and charge you 1 mil for adding it.

Here are a few examples of how trades would match in PSX, as per Nasdaq’s website: PSX example trades.

This is a substantially different logic than any of the other exchanges, which all utilize Price/Time priority. In that model, at any given price level it is first-come-first-served, which is to be contrasted with this pricing logic, where you can be the last one at the party and still muscle in on the print. The exchange goes live on October 8^th, 2010, and you can be sure that simulators are trying to figure out how to best play rebate arbitrage with this exchange included.

I guess if you are the fastest (i.e. the Usain Bolt of HFT), and you and everyone know it, you will want to add liquidity by buying on NASDAQ Classic, and once you have added and collected the 29.5 mil rebate, you will want to first hit any displayed bid at the same price you added at on Nasdaq BX, where you can collect another 3 mils. Now if there is no bid at the same price you bought at on BX, you may try selling on the offer a penny higher on NASDAQ Classic, and who knows, maybe you collect another 29.5 mils! Woo Hoo! Or maybe you try offering a hidden midpoint add liquidity only order, where you cant get charged a take fee, and you can only get another rebate. Or maybe you set up your prop router to first SCAN, and maybe try TFTY (thrifty) which will preference BX first. Or maybe you try those, and then switch to MOPP, which routes to protected quotes, and then post the balance to Nasdaq’s book. Or maybe you even route using SKNY and opt out of non Reg-NMS protected quotes (i.e. dark).

Now, how do you adjust your simulator if you doubt that you are Usain Bolt, but still like playing Spin The Rebate? Maybe you try to make sure that you can squeeze in some prints via PSX, where you don’t have to be the first nanosecond guy there. Maybe you try SKIP instead of SKNY, and then throw in a QTFY or a STINGY. Maybe you switch to BATS or NYSE, and try their order types and routers. Hang on I gotst to get my new rate card out for BATS. It is not laminated yet, as it may change in a week, and that laminating crap at Staples is wicked expensive.

Will your institutional algos that are provided to you by your brokerage firms adjust your algos to account for how the Rebate Arb October Simulator (RAOS) predicts order flow to cycle through the different destinations and routing strategies? A good question to ask in my opinion.

And what happens if one HFT programmer messes up, and in his new prop engine matrix he sends out a wrong order type, or puts in a number in Tag Field 87 in FIX that should be in Tag Field 88?  Will Accenture (ACN) trade at a penny again?

How you guys all feelin’? Is it complicated enough for you? Don’t worry though, because it’s been guaranteed to be understood by those that matter: The Exchanges, Our Regulators, and the HFT Programmers. Investors who are buying a stock to own a piece of a business, for the long term, they don’t need to know what is in the sauce. Unlike the past, it is not important for all participants to have a vague understanding (at a minimum) of how the stock market works. The Regulators, Exchanges, and HFT’s have figured that all out. Trust them. Their track record is spotless.