Machines and Markets: The Island Matching Engine and the Inversion of Finance

Donald MacKenzie

Based on joint paper with J-P Pardo-Guerra

Noon, 20 Oct 2011, 1 Central Park West

Josh Levine

‘we need to highlight the creation and assemblages of Spacing(s), Timing(s) and Acting(s)’ (Jones, McLean and Quattrone, ‘Spacing and Timing’, Organization, 2004)

How US shares were mainly traded in the early 1990s:

New York Stock Exchange: Specialists and brokers

NASDAQ: Broker-Dealers & telephones

How US shares (and many other assets in other countries) are traded now:

How US shares (and many other assets in other countries) are traded now:

Island, 1996-2002Sources: Documents (e.g. source code of Island matching engine; messages to WATCHER users, March 1995-Dec 1997)Email ‘interview’ with Josh LevineInterview with Matt Andresen (CEO of Island from 1998)Interviews with six former Island employees

Part of larger corpus of 93 interviews with high-frequency traders, other specialists in electronic trading, exchange staff, etc.

Innovation is bricolage (qv misinterpretations of ‘performativity’)Machines (Island matching engine) help shape markets ANT ‘inversion’: scales aren’t fixed; micro can become macro and vice versa; content and context can switchPath-dependence (in QWERTY sense)?

SOES, NASDAQ’s Small Order Execution System. Compulsorily executable against broker-dealer quotes from June 1988. ‘SOES bandits’ eg Datek, Broadway Trading, 50 Broad St. ‘You did it again, I’ll fucking kill you!’ (Patterson 2012: 87)

Island ‘like most code in the world, more evolved than designed’ (email from Josh Levine, 21 May 2012)

FREDY: audible warning when NASDAQ order executedMonsterKey: programmable macros to speed order entry into SOES. Watcher: began ‘as just a program to watch for incoming executions and keep track of a trader’s position’ (email from Levine, 27 Jan 2012); evolved into full-blown trading system.

Island evolved from ‘Customer to Customer Jump’ trades on Watcher.

‘you see 4000 shares for ZXYZ for sale at 22 ½ on Island and you want to buy stock at 22 ½ … You would press <Shift 2> to enter an order to buy 1000 shares (2 lots of 500). …Want to buy 2000 shares? Just press <Shift 2> twice. Fun.’ (WATCHER News Frame, 16 February 1996)

Island ‘cold rice and rat meat’ (Andresen interview)

Coppola, Apocalypse Now: ‘Charlie didn’t get much USO. He was dug in too deep, or movin’ too fast. His idea of a great R&R was cold rice and a little rat meat’.

Matching

‘Bids’ to buy ‘Offers’ to sell ↑

$7.78 400$7.77 1091$7.76 800$7.75 488

192 $7.74500 $7.731500 $7.721300 $7.71

↓

‘we were the first group [generation] of people who grew up with PCs and didn’t think you needed a mainframe to get something done.’ (Interview with former Island programmer, 1 May 2013)

Multiple cheap PC CPUs, and Mold (‘built out of UDP to provide a reliability layer’)UDP: ‘no handshake … you just kind of blast data’ (interview, 1 May 2013)

ITCH: feed disseminating all changes to order bookOUCH: protocol for computerised order entry

Island matching engine didn’t write to disk, no delays for two-phase commits. ‘enter2order’ procedure: if possible reuse record in cache of recently cancelled order (Josh Levine, ‘Island ECN 10th Birthday Source Code Release!’, available at www.josh.com)

Levine essentially sole programmer of first version of Island matching engine; later rewrites kept same architecture.

In other cases, writing a matching engine much more cumbersome organisational task.

Island matching engine latency: 2 milliseconds (Qv Instinet engine: 2 seconds)

Low latency facilitates ‘electronic market making’: posting bids and offers, earning ‘spread’.

‘Bids’ to buy ‘Offers’ to sell ↑

$7.78 400$7.77 1091$7.76 800$7.75 488

192 $7.74500 $7.731500 $7.721300 $7.71

↓

2 millisecond matching engine latency makes spatial distance salient: eg 10 millisecond delay between Kansas City and 50 Broad St. ‘We were excluded because of the speed of light’ (Dave Cummings, founder Tradebot, quoted in Wall Street Journal, 15 Dec 2006)

From 2002 on, Tradebot and other automated trading firms co-locate at 50 Broad St.

With low fees, ‘rebates’ (small payments to those who post orders that later are executed against) and ultra-fast matching, Island becomes formidable competitor to established exchanges.2000: Datek sells Island to Bain Capital. 2002: Bain sells Island to Instinet. 2005: NASDAQ buys Instinet’s US business.

Technologically, NASDAQ comes to resemble Island (ITCH, OUCH, matching engine in Levine style).New York Stock Exchange buys and in part comes technologically to resemble Archipelago (Chicago-based new trading venue).

The ANT inversion: Island starts ‘micro’, shaped by existing institutions, esp NASDAQ. Feb 1998: 4 Island employees.

By 2008 Island’s features (low fees, rebates, electronic order book, fast matching engine, colocation) become effectively compulsory, because all share-trading venues have to attract electronic market makers. This is now the ‘macro’ context within which institutions (eg New York and London Stock Exchanges) have to operate.

Key vehicle of inversion in Europe: Chi-X, new electronic trading venue set up in 2007, with matching engine written by 2 Island programmers.

Path-dependence? Are the features of Island a ‘trans-historical’ attractor? To date, only limited signs of this in trading of bonds or of foreign exchange.

Part of explanation: reform efforts of Securities and Exchange Commission, and its almost exclusive focus on share-trading. But Island, its history, the local conflict out of which it emerged, and its matching engine important in providing the most influential single exemplar of new way of trading.

Innovation is bricolage (qv misinterpretations of ‘performativity’)Machines (Island matching engine) help shape markets ANT ‘inversion’: scales aren’t fixed; micro can become macro and vice versa; content and context can switchPath-dependence (in QWERTY sense)?

See also D MacKenzie and J-P Pardo-Guerra, ‘Insurgent Capitalism’, Economy and Society, forthcoming. Available at: www.sps.ed.ac.uk/staff/sociology/mackenzie_donald