Sandy Koufax, HFT, and… IEX?



Our beloved Major League Boys of Summer returned to their training camps this week, giving fans hope and promise of warmer weather, apple pie, and 162 games of high-speed action-filled games. Well maybe not that last part.

Baseball is starting to creep back into all of our minds – including the mind of Bill Harts, CEO of HFT Lobbyist Modern Markets Initiative (representing four HFT firms – GTS, Quantlab, Tower, and Hudson River Trading). Harts sent out a propaganda piece yesterday titled Sandy Koufax and the Pick-Off Move. In this piece Harts urges you all to take a step back and “consider the high-level issues around market structure”. Specifically he wants you to all see how unfair the IEX router (which bypasses its own 350 microsecond speedbump) is for his clients, even though that router is quite fair to each of you.

Harts chooses to use a Sandy Koufax Trading Card analogy to make his point.

He asks you to imagine that you are just regular folks, like his clients, and that you need to raise some money for college tuition for the kids. You therefore embark upon trying to sell your three Sandy Koufax baseball cards. You place them for sale simultaneously on eBay, eBid, and Craigslist for $1500 each. Then:

–          Someone on eBay buys your 1st Koufax card for $1500. Clearly there is demand to buy Koufax cards at $1500 a pop.

–          You quickly log onto your eBid and Craigslist accounts to raise the price on your remaining two cards to $1600. They sell at that price, and you ultimately yield an extra $200 for your kid’s college tuition because you are smart, and could log in quickly to the other auction sites and raise your price in time.

–          IEX is out now with a way that will keep you from your extra $200! IEX thinks it is bad that you have the chance to raise your prices, and offers buyers a service that allows them to buy all of your cards before you have the chance to quickly log on to your other accounts and raise the price.


Harts acknowledges that IEX allows for a:

“great outcome for the buyer, not so great outcome for you, especially if you come up short a couple hundred for tuition.”

And he wants you to identify with the seller of the cards, as that can easily be you!

Wait a minute Mr. Harts… Not So Fast… You all should not identify with the card-seller in his analogy, and here is why:


–          If you are one of Hart’s high speed clients, and if you do not want to sell all three cards at the price of your choosing and be at risk, a simple solution for you is to not offer the three cards simultaneously! Perhaps offer one card for sale, and then see how that goes, and then list the other cards!

–          Do Ebay, Ebid, and Craigslist pay you a rebate to list your item there? Or do they charge you? This is a big difference between his analogy and the stock market. This rebate thingy in our stock market distorts economic incentives, and perverts behavior! Harts doesn’t talk about rebates because he knows you will tell his clients “perhaps you should not be so greedy and make risky decisions based on rebate-lust”.

–          The lot of you are not typically high speed short-sellers, like Harts’s clients, who have “market making” exemptions from short sale rules. How many of you would list multiple Sandy Koufax trading cards for sale on Ebay, Ebid, and Craigslist that you do not own??!


Harts’s clients want the benefits of posting on numerous rebate-showering exchanges, with none of the associated risks. They do not seek to buy or sell a stock in and of itself; they want to buy or sell only when they have a high probability of being first in line to capture a rebate, as well as the assurance (that if that buy or sell is non-advantageous) they can get out at least with no loss by closing out their bad trade against a slower player. Haim Bodek wrote extensively about this game, which he terms “zero plus tick”.

Here is a novel thought: perhaps the market would be better off if participants only posted bids and offers for securities they actually were comfortable making.

Here is another thought. The Status Quo Stock exchanges create advantages for subsets of their participants all the time. They use things like rebate tiers, special order types that jump queue, and even special order types designed to get a rebate BUT not get run over. What’s wrong with a new exchange creating an advantage for the investor… where that investor can buy the Three Sandy Koufax Cards at the price they are advertised at?

Circumstances change. Free-market forces help bring about change. We do not have the right to embrace change and innovation only when that change benefits us (or our clients).


Speaking of change, and baseball, perhaps Mr. Harts would find this Sandy Koufax fact interesting:

When the Dodgers moved to Dodger Stadium in 1962, that new park was a pitcher’s Mecca. Sandy Koufax was an immediate beneficiary of that change, lowering his home ERA from 4.29 to 1.75.


Have a great weekend!