What's going on moon gang, the interview you're about to listen to is with dave lauer. Now, if you don't know who dave lauer is he's a pretty smart cookie, he happens to be a market structure and high frequency training expert in the past. He's appeared in front of the senate banking committee and also on various sec panels, so he definitely knows what he's talking about now. In this particular interview, we discussed many things, including the gamestop report, the citadel securities versus sec lawsuit, and we spent most of our time.

Talking about how the apes can win the fight for market transparency and fairness, and one of the things that really blew my mind - and we talked a lot about it - was how the insanity of gamestop back in january, truly presented an overall systematic risk and could have Potentially brought the entire wall street establishment to its knees, it's definitely a worthwhile listen. I hope you enjoy welcome. Welcome back mr dave lauer. We appreciate it.

I think this might be time 48 with you joining us to really express what's going on and i'm just excited because you're always a wealth of knowledge and it makes sense. I mean you've talked to the sec panels. You've talked to senate banking committee about all this, and it is always a treat when you're able to share your knowledge and with it, just feels like october, has been crazy in relation to what's going on with your expertise, the market structure, the ape community. So a lot of things i want to talk about and if we could just kick it off the gamestop sec official report.

The thing that good thing we never held our breath on because we would be dead by now. Finally came out on october 18th and now that we've had a little bit of time to process it. I know at first there was a bit of frustration. People felt as if in a weird way it was neutered.

I don't know if it would even really count as a good faith effort, but could you just the high level of like what are the main takeaways of the gme report for you that you're like hang on this is a bit interesting. It might be worthwhile to dive into more yeah and thanks for having me matt, it's great to be back, and you know good to be talking to everyone and and, as i always say, it's still so cool that everyone's interested in market structure. Uh. And you know i love talking about it, so um yeah, you know i my my first reactions to the sec report were that it was uh watered down it really um.

You know the first part of it was like a market structure primer which cool that's great. You know the more we have of that. I guess that's great, you know, i think it's important that people learn about this stuff. Obviously, but uh you know i i thought it stayed.

The report itself stayed at a very high level, um and in fact, even as i mentioned to you like rereading it recently it it didn't. You know it didn't really get into the meat of the issues uh, as as i had really hoped it would um. You know it talked about, was there a short squeeze in gamestop? Was there a gamma squeeze uh? Was there you know, and and so let's take the short squeeze question and and and the the report you know. Actually let me see because i have it um.

I have it up here and, and it said um something actually that kind of jumped out at me uh or is this on page 30, it said, while a short squeeze did not appear to be the main driver of events and a gamma squeeze less likely. The episode highlights the role and potential impact of short selling and short covering. Now, that's like a really interesting way of phrasing, things right, because it's actually completely non-committal right. It's like did not appear to be a and less likely um, but you would think that they could have been much more definitive uh.

Was there a short squeeze? You know not the appearance of one you know and then, if you look at the charts, something is not quite adding up to me. So what i was looking at earlier today was figure 5, which is the short interesting game, stop on page 27 and and figure 6 on page 28, which breaks down how much volume was just straight up buying, which you know is essentially fomo and how much uh Of the volume was short sellers covering and it i might be missing something here which is plausible, but you know you see short interest at more than a hundred percent of the float. But if you look at the size of the bars of short seller covering on figure six, it doesn't even look like it comes close to adding up to the float, and yet they show the short interest dropping from well over 100 down to something like 20. So like essentially, the float would have had to have been bought uh to cover, and it doesn't look like the numbers.

Add up so something about. It is still not adding up to me um. You know i. I do think that the biggest thing and in terms of trading dynamics that jumped out to me and continues to jump out to me, is this uh.

This notion that, anywhere from like three to four to five times, the float of gamestop was trading per day, and this happened multiple days in a row. I spoke with a friend of mine who has been in markets far longer than i have and uh and who thinks um that these events are the he really buys into the sec's explanation, and so you know, i think you always have to consider. There are obviously two sides to these arguments, but even he admitted he's like you know, sometimes when there's an ipo you'll see twice the float trade he's, like you know, that's he's like i've seen that before you know, but five times the floats. I haven't seen that before and and while all of us kind of understand, technically how that can happen, mathematically how it can happen it.

It doesn't quite make a ton of sense at a quality. I should say at a qualitative level. It's like quantitatively, we can understand kind of the theory that would get you there, but qualitatively it just doesn't seem right um. So you know these things still stick out to me, um and then there was more in the report about the clearing agencies and the margin calls capital calls which certainly fueled a lot of instability.

The disabling of the buy button, which, while extremely controversial in the ape community as as it should be, is also, i think i should tell you controversial uh outside this community and on wall street um. You know, i. I think that some people would call that market manipulation. I don't think you'd be off by that.

You know instead of halting the stock they disabled buying. That's you know. I've never seen that happen before and um again. You know i talk to people in the industry.

I still have friends all over and, and and you know, a lot of people are coming around to the idea that something really extraordinary happened and they want to understand better. Why and what um? So i you know, i don't think this is over. I think the sec report you know was was maybe step one, but i it really feels like there's a lot more digging. That needs to happen here.

Okay, and with that, i really want to dive into one thing. You just said there that, with your years of expertise like following the markets and all of your entire network, that's very grounded in wall street. No one's seen this before that type of a one-sided pco thing where, like some brokerages, are trading it. But we know from the report that it was a retail driven thing at that moment in time, especially in the u.s.

Most retail was like clearly located on robin hood: the fact that they could do this one-sided, like it's i've, never seen it, but that's not too special. I'm 27.. I haven't been training for that long, but the fact that so many people are coming here and saying this is ludicrous with like hundreds and hundreds years of total, like just stock market experience, i just really want to drive home that point additionally from there and and Honestly, like to that point right when you, when you really kind of dissect it, i think what you see is that in that moment, in that january moment, retail was right. You know the apes were right, they were spot on and they there was an opportunity there to squeeze that thing and as peter fee came out and said, and several others again that i've talked to since then, like that the systemic, the risk that that introduced and Exposed in the system was pretty dramatic, um and you know again from other conversations like firms.

The intermediary firms, like the you know, the the the internalizers um had never seen that kind of unidirectional flow. So this really was essentially like a black swan kind of event. That took a lot of people by surprise, and you know once again, you sort of had essentially a bailout of the firms involved. You know the firms came together and protected themselves to the detriment of retail, and so it is not surprising that people are very angry and upset over that, and not only that.

But there were people that bought at very high price levels because they were right right. Like this thing was going like uh parabolic uh and you know they might have lost a lot of money and and for them to think that this doesn't seem right. Is it it's not a surprise? It's so wild to me because, as i sit here and we're slowly, putting together the the puzzle pieces of this story, it's that thing that you just commented on from thomas peterfree. Those of you who don't know a highly respected market structure engineer owns interactive brokers, created it a lot of commentary.

That comment was from february where he said this was a systematic risk and that's crazy, because those are just two words. We say just throw it out. There systematic risk, but when we think about it, that's insane one one stock gme had the potential like, and this is where i'm like. Okay is my tinfoil hat a little bit too tight right now, but it had the potential of really really messing things up, potentially bring it to a complete halt and i get it and i'm of the opinion.

I do not have the evidence of this that there had to be some sort of conversations citadel securities, clearing brokers, robin hood, the sec. They might have been knocking on their door and saying we have one of two options: let the smart, like the market fall and we'll see if it completely collapses or we're just going to screw over a bunch of retail. That's a tough decision. I get that.

I'm very happy i did not have to make that decision, but i think people like myself and - and i believe you we're trying to say we should have never been there like that - should have never been the binary option. It's just and to me, and i would love to get your thoughts on it. The reason we got there a lot of it is because so much power is concentrated in too few of players and i'm obviously referring to citadel securities and virtue they bragged about it, and you called them out of like you're happy you're, the only one who continuously Provided liquidity - that's not good, we should not be relying on that. Am i completely off base or, like is, is my hat a little too tight.

My tin, foil hat are like i guess like what it's only as tight as thomas peter fees. I mean that's what he came out and said right. That was when someone like that and - and you know again, people who are new to markets that they might not know who he is or they might just have recently been introduced to him. But, like he's a giant in markets uh, this is a guy who i i told you before you know like he built his own trading tablet to do options market making in the 80s uh on the floor when things were still being traded by traded by paper.

You know there is no one who knows more about markets than this guy and - and that was one reason why such a statement was extremely meaningful and impactful to me, because if he sees it, then there must be something to it and then again, in my conversations With people very senior people - people that know more than i do they, they agree with him that there was a systemic risk and so to be frank and - and i'm not saying it's, what the ultimate action taken was right. But if regulators are not on the phone with clearing agencies and a systemically important firm as the prospect of u.s markets grinding to a halt is unfolding, i think that would actually have been irresponsible. So i i find the denial is a little strange. You know during the great financial crisis, we know that regulators and exchange executives and uh - you know institutions, the biggest banks were all coordinating closely to try and keep the us economy from falling to pieces.

The fact that you know a video game store stock could have ground u.s markets to a halt is a very bad thing. Let's not get you know, let's that that's an insane position to be in, but at the same time, yes, you know if that is about to unfold. I think you do want people on the phone talking uh and trying to figure out how to avert it. Um now, at the same time, why is it that all of the people, the retail, the apes who were right get penalized? And you know a firm like robin hood and others? Don't right, then it's it's again, the same sort of 2008, all over again, where they bailed out the banks and a bunch of mortgages got foreclosed on like that was wrong.

That was morally and ethically wrong. The people who got penalized are not the ones who should have been penalized and i think we're seeing exactly that in this situation and that's why it feels so wrong. That's very interesting! I it's almost to the point that it seems like all the people who society agrees, knows about this structure and what's going on they're all saying something went weird there we don't know exactly the details because right now, obviously the sec has not subpoenaed all the trades. The communications like or whatever government body would have to do that.

But what's weird is i maybe i'm taking too many crazy pills, but the only people who are trying to tell us that it's okay are like the only handful of people profiting off of the current system. It seems, like literally everyone else is like. Oh no. No.

We we dodged a very, very big bullet and right now, mainstream media, especially they talk to us about like how we're so stupid we're so wrong, and it's a big issue like right now they almost try to make you feel bad like wait, you don't want to Help minorities who want to trade that like, are you being a racist right? It's like that's not what we're saying whatsoever they try to distort it in so many different ways, and i don't know if someone who has not the only people who seem to be protecting this extreme amount of off-exchange training are the people who are making money of It like seriously, do you know of anyone else, who's like? Oh, no, no! I like the system this way. Yeah! No, did you see my i mean i. I was tweeting about this yesterday and i said um you know on thursday i was like that. I i don't know a single person defending the practice who either isn't part of it today and making large amounts of money from it or had been part of it in the past and that's essentially where their fortune has come from um and again, even the firms That now defend, it did not used to defend it when they were on the outside.

Looking in and a lot of, very sophisticated firms who were on the outside looking in continue to make the exact same arguments that we're making and part of the problem when you create a a extremely complex and fragmented system, as we have in the u.s and you Segment order flow like this into just a couple of firms, is that there is a huge advantage to scale right, so a firm like citadel or virtue can make tighter markets at higher scale, and so they crowd out the competition. It's a system that naturally leads to monopoly or concentration and extreme levels of concentration at that, and so that's that's the inevitable outcome of this system, and not only do you end up with concentration uh in terms of market share, but you end up with concentration in Terms of risk, and so these firms become systemically important now, that's why the answer is: let lots of firms compete for the order flow. Let a thousand firms compete for it, not two or three or seven, whatever you think. The number is because it's you know pretty much just two but they're trying to like let a couple other firms in to make it look like it's kind of more competitive than it is, and you know, keep the antitrust authorities off of us.

But it's not it's not competitive until you have a thousand firms competing uh in the open, where everyone can uh compete over that order, flow and spread out the the gains and so lots more firms can make money that gives us greater diversity in terms of trading And markets and it spreads out the risk, so you don't end up with that kind of concentrated risk in the system, interesting so to the returning viewers, the new viewers and knock on wood. Let's hope some regulators watching this video. I think a lot of them could consume it and say: okay, i get that something like potentially catastrophic could have happened, and i get that a lot of people are like kind of just yelling. These apes are yelling out like hey.

We want this fixed and right. There your your first solution is: okay, we need more competition, we need to disperse the risk over many different players, so we're not relying on one but for the people who, like could potentially actually write new laws and governance related to all this. I've. Seen from my research on you that you've talked quite a bit about how a nice alternative is what we're currently seeing in canada.

So for all those viewers - and like i said hopefully, regulators, could you go into a bit more detail of that market structure of why it's better and also how they can successfully take off so much trading from off exchange and get it on to lit exchanges. Sure you know canada like pretty much every other market in the developed world does not allow payment for order flow and it imposes a higher burden on off exchange trading, and so what what? What canada has is something called a trade-out rule, and this is a rule that the exchanges in the u.s have been pushing for for a long time. Uh. In fact, it's one that i've been pushing for for a long time, um and you know so sometimes uh.

The exchanges and i align not all the time they don't like me for other reasons, but you know for this particular one. We agree on this issue and a trade out rule simply says that when you execute volume off exchange, you are free riding that public quote. You are damaging that public quote because you disincentivize market making and so to do that you have to provide compensation for the damage and that compensation is material, price improvement. Okay.

So if you're going to execute off exchange in canada, you have to provide at least a full tick of price improvement, a full penny. If the spread is a penny wide, then it has to be a midpoint execution at least half a penny of price improvement. So the minimum level of price improvement for off exchange trading in canada for small orders is half a penny, but for most because you know it's sometimes you have penny spreads, but anytime you have more than a penny. It's going to be a penny of price improvement.

That's uh. That's a big deal, that's a hundred mills, so we talk about uh prices and fees in u.s markets. We usually talk about them in terms of mills. 10 mils is a tenth of a cent.

One mill is a hundredth of a cent. It's more of you know, sort of wall street jargon, but it's a convenient way to start to refer to smaller price increments. When you look in the u.s, the vast well, the vast plurality i should say of price improvement in u.s markets, which is the price improvement, citadel vertu and the others are providing to retail investors - is one. It was a hundredth of a penny per share um.

So a penny for a hundred share trade is the price improvement you get um and, and that's that to me is just absurd and it does not justify moving that volume off exchange. So the canadian model, i think, is a good one. Now the argument is always to simply make fun of canada honestly like when you. When you bring up this kind of argument, let's say on twitter to doug sifu.

He will laugh at you and he will say no usa, usa, we don't want to be like canada. Are you crazy, but it's it's such a ridiculous argument, because when you actually look at global execution costs now the us market, i think i've said this before you know the us market is the biggest and as a result of that size, we look really good. But when you start to control for the factors like company size, you start to see that actually execution costs in other countries are lower than the us, because those countries are not as fragmented. Their markets are not as distributed across multiple systems.

They don't segment their order flow and those things mean that you get better execution quality. So, instead of making fun of these arguments, these arguments are grounded in math and they're, grounded in common sense, and we should have you know reasonable debates on them. But we should recognize that you know because someone who's making millions and millions of dollars a year uh puts down the argument and makes fun of it. Uh, because he's incentivized not to does not mean it's a bad argument, and i i think this would be a very important rule for the us to consider and i'm really hopeful uh, that this new sec regime is the one the kind of one that can take.

A stand and can actually make this kind of really big change, and i don't um, you know, sort of minimize the difficulty of coming out with the trade-out regime, because you're coming out against extremely wealthy and powerful interests politically, and that has never been something. That is easy to do in the us, so before we get a little bit more into that um. I get this it's kind of it's not it's kind of a red herring argument of like making fun of canada, but what's weird is people with influence like i'm talking, mainstream media, that's getting views of millions they're like you know who else doesn't have payment for order Flow north korea, like what, like i'm 27 and i feel my hair going gray when i hear the most idiotic statements, such as that. So like it's nice that people like you are willing to share it to get us all onto the exact same page of.

What's going on, but for me to summarize the canadian trade ad, just let me know if i'm wrong for people who maybe don't know, is not enough about market structure such as yourself, so it's basically in the u.s. We have a system that says trust me bro. I'm going to get you a better execution and in canada it's you only get that trade. If you actually show it, i feel like we're.

Just totally trust me bro. I got this all right, it's just for everyone else there i think we can like. That makes a lot more sense to most of us it just we all totally trust ken griffin right. I trust that guy, so so much yeah.

We can trust him. It just seems wild because in canada they clearly have to show that it's a true improvement before the trade goes there, and here it's the opposite. It gets to the live exchange only if they don't want it. It's toxic they're going out of their way be like we have no edge here.

Good luck on the open market now like and it's the worst trades, it's just it's insane and then, and so, if you look at canada, you end up with something like seven to eight percent total trading off exchange relative, as opposed to the us where it's 45 Yeah and then i just ran the math on some of the more interested stocks of like amc and jimmy it's pushing 60 percent, not even half of the trades are done in the most regulated lit environment. They're all done in, like a less regulated trust me. Bro environment, which is just insane so with that being the the structural part of the people who really nerd out about it like okay, here's where we're going a very fair question is well. How do we get there because, all of a sudden, an argument that i would argue is like the 99 versus one, it seems like people are trying to cut it in half and make it super political.

I mean, even with the gamestop report coming out. We had two of the commissioners. They like they didn't full-on distinct, but they had commentary that they're like we don't necessarily agree with this, and it's just it's a certain point where it's tough to know if someone has a legitimate gripe or if they're, trying to protect their own political and or financial Interests so with that being said, what's your opinion on like the proper steps forward, because obviously the system should be fixed where it can't be brought to its knees by some weird systematic, like black swan event, involving like a video game seller like that's insane, it's insane And you know i i i get very frustrated um when, and this has been sort of the story of my involvement in my public involvement in market structure. Uh, where i you know.

I generally believe that i am basing what i say on facts and objective analysis. Uh, i consider myself pretty independent um. You know i i do have as i've said before you know. I've been compensated by iex for like the six months or nine months that i worked there uh in 2012, but my views had not changed.

Like my views before doing that were the same as my views even to this day, they've evolved and matured, but like they're, basically the same um and - and there are very few people out there - i think who are able to give sort of this independent perspective on Market structure and - and you know it - it seems so crazy to me, but not surprising - that politics becomes such a fundamental part of these discussions and today, in this day and age, politics means partisanship and that's even more of a shame, because it actually wasn't like that. Let's say five years ago: you know it was, it could be political, but you didn't really necessarily see it break down along traditional lines. Yes, like when i testified before the banking committee, the republicans were much more skeptical of anything that might involve regulation uh and the democrats were generally more supportive, but my point has always been that the current system that we are in is one of regulation like it Is regulation has created this current system so making the argument that changing those regulations is actually introducing new regulations. I find to be very disingenuous uh.

You know this is a system that is born of a particular regulatory framework and structure and to make adjustments to that is not uh. You know, like the democratic nanny state trying to to destroy businesses. You know i i. I think that that kind of argument is one that republicans will come in and make uh like toomey, for example, and the you know the republican sec commissioners, because if they can make an issue partisan, especially in this day and age, they believe they can really split.

People right like these are it's a sort of classic approach of wedge issues, and both parties are very good at identifying wedge issues and driving them in to split people apart, whereas you know, if, if we take a step back and say what are our principles of Of market structure that we should all be able to agree on, you know those principles are transparency, uh and open competition for order flow right like and - and i think one should be simplicity right like we want the simplest possible system, not the most complex, which is Certainly, what our current market structure has given us. So if we think about um, you know regulatory changes as trying to peel away complexity and introduce transparency and open competition. I mean those should be principles that nearly everyone can agree on. Those are not partisan issues, uh and - and you know so, i think that uh, the sec has indicated that it is going to be coming out with a proposal.

It's going to be trying to act on payment for order flow and uh, and you know a reevaluation of our current market structure and i think there are lots of issues that almost everyone can agree on in terms of better uh disclosures and transparency um. And then there are going to be issues that are going to be a real war and payment for order flow and off exchange. Internalization is going to be that war, because a powerful group of people make a lot of money doing it and anytime. You threaten something like that: it sets up to be a political war and it's going to be driven by political donations and political influence, but also, hopefully, by this grassroots movement that can exert some influence and maybe be one of the reasons that we get positive change In market structure interesting, so with it reading through the report and even uh chairman gensler, some of his comments, it does seem like they're making some of the headway on settlement time.

I'm a fan of that. You were even talking about the 13f like reports i like that of like let's get the shorts in there. I haven't heard too much about pdt, but maybe that's a battle for a different day same with ftd reporting. To me, it's too slow, there's really not like.

No information on who prompted it no information on how they fixed it to me, that's another one, but i also understand that, like sometimes you have to pick your battle to win the overall war, so it seems like right now the biggest and quote best thing: we Could fix is the extreme amount of abusive off exchange trading. So if we're going that way, i just had this thought of i i myself say it as david and goliath, the 99 versus one, but in a way i could actually almost argue now it's more extreme than that as in everyone, except for virtue and citadel securities And here's my thought: you even go to the world's richest people. You point them at their stock account and be like. How would you have liked it if that went away like in a certain way we could almost like just if you're in the market? You should care about this because it was that close to going kaput.

So, even if you have billions of dollars on it, you're still on our side, man like we're, you know we're in a certain way. We are fighting for everyone involved in the market, exclusionary of virtue and senator securities. I mean just even though even those even those that aren't in them right like people, this has impacts on people's jobs right. It impacts companies, ability to raise money and to grow it.

It is a driver of economic growth, so you know i would, i would argue it's even broader, but yes absolutely like. If you, if you look at the current participants in markets uh, you will have you know the internalizers and the discount brokers on one side of this argument and you will have everyone else on the other right: the exchanges, the asset managers, the apes uh. You know uh even apparently the regulators um, and you know i i think individual investors should be on on the side of the issue. That says, let's have open competition for order flow, because, while citadel and virtue are going to try to scare people they're going to use scare tactics to stay, you put those orders on exchange.

You are not going to get price improvement, everything's going to cost more, and i just think that is flat out false and they have no evidence to back that up. They will, they will say they have statistics because they will say look. There is no price improvement on exchanges, no there's no price improvement on exchanges. That's what happens when you put all the order flow over here right.

You want to send that order flow to the exchanges. There's gon na be price improvement. It's not like what citadel and virtue are doing or magic right you could. The other market makers can do the same thing.

This isn't magic, so you send that order flow to the exchanges. You try and reduce fragmentation, and we know that spreads will compress so immediately execution costs will go down and you would have a thousand firms competing over price improvement. It. It honestly seems like a no-brainer to me, and you know i i agree with you that you know everyone should care about this issue, because it's not just about price improvement and execution quality.

It is about systemic risk and the fact that our system has become relatively fragile and that should really concern us all. So, if we're all on board with that, what in your opinion, is it to the point where we need to talk to government like find the ear of a congressman woman, a senator something that's going to listen to us, because, obviously, at a certain point, it seems Like we're kind of getting pushed off like we're, just the crazy people like, let's keep them in the corner, but to show that we're serious, like i'm too new, to know about like okay. How do things really get done politically, but do you even have thoughts on that of like how to elevate our argument to at least the people that, like for us to have a fighting chance yeah? You know i've spent years um advocating for these issues uh. I have met you know.

You know: i've testified before uh senate bank committee, but i've met with members of congress. I've met with their staff many times. I've met with regulators many times and talked about this. All of these exact issues.

For a long time now, um - and you know i will say that i am extremely uh skeptical about anything with congress. I don't think congress is going to do anything here either way. There just aren't the votes and really they don't seem to care now. Maybe they can be made to care, but usually congress responds only to campaign contributions and pacs, and so i don't know that that's the route that personally, i would, i would think, is fruitful.

There are bills up in the house to eliminate payment for order flow. Senator toomey just recently announced a bill to protect payment for order flow. I honestly doubt that either of those bills has any has enough votes to make it past - let's say a senate filibuster and to actually be enacted into law. What i do think is a very promising avenue is the the um advocacy and um you know.

Speaking with regulators, i i think that the the answer is going to come from the regulators on these issues and uh. I do think we're going to see something soon. You know the sec and gents, and gary gensler have been indicating this for quite some time that they are going to make a move and when they do, there's going to be a war. And to me, that's where to fight the battle is to is to back up if, if the sec comes out with something aggressive, that's when the political machine will crank up, and that's where the you know, the the grassroots movement needs to step in and to take The other side of it and to say no, we we care about this issue, we understand this issue and we and we want to be um.

You know we want to be constructive about how to approach and solve the issue right it and - and i think if, if if we can do that, there's a real chance for some substantial material change here and for a point of clarification. The next, i guess, like batch of comments from the sec, is expected to come out roughly mid-november right, like is that the net like? Obviously this is a long litany of comments and back and forth, but that's the next one where you're expecting to hear about these rules as they relate to payment for order flow. You know i i'm not 100 sure on the timing, but um i you know, i do think that the sec will come out with some kind of proposal next month, yeah, i you know it from what i'm hearing and some indications uh are it's coming soon. I think it'll be before the end of the year, um and yeah.

So if it's next month, what will happen is the sec will propose um? Hopefully so there there are. There are two things they could really do. Um. They could essentially like open a comment file.

Um, like the the um there's still like a 2010 comment file on market structure, that is open, um and if so, many of the times that i have advocated for things with the sec. I've done it through that comment file where i could file a comment letter and then i could meet with regulators to discuss that, but what what i think is going to happen in instead here is instead of sort of this request for comment. I hope they're actually going to come out with a rule proposal, so the rule proposal will be very specific. It will say you know, hopefully we're going to ban order routing inducements, so that's not just payment for order flow, but that's also exchange rebates.

That would be ideal to see that and we're going to propose a trade-out rule. So if those two things are in a rural proposal, the the war will be intense, because those are two really fundamental parts of u.s market structure today, and so then there will be that will open up a comment period, um and that will last i mean for Something like that, it'll probably be a couple of months of a comment period. Um then the sec will have to get all the comments and there is a very distinct process that is prescribed by law for what they have to go through. To evaluate those comments.

Look at every single one of them and then you know make a final proposal which might be different from the initial proposal, and so that's the process that um. You know that where these arguments will play out and again, you know this is the kind of thing where, if people can come together around reasoned arguments to support what the sec is going to try to do or even push them further, then that can be a Very effective way to advocate before regulators. Well, as that work gets going. Obviously, i'm excited to bring you back on as we're giving a live by live play uh speaking of a different type of war, though it seems like citadel securities, is continuing its never ending war with iex, which, for those of you who don't know, is a lit Exchange and they were created back in 2012 to basically battle high frequency traders.

They have a special type of order, called the d limit order and the high level view is. It helps battle against latency arbitrage. Citadel securities is currently suing the sec. It happened on the 25th, was the the court case and right now, they're deliberating on it and they're saying the sec didn't follow the proper steps in approving that, with that particular war citadel securities versus iex, could you give us your thoughts on that? Maybe explain to the audience what latency arbitrage is and how you think things are going in that particular battle, sure um, so yeah, you know citadel has fought iex every step of the way they were sort of the most vocal opponent of iex becoming a stock exchange.

They opposed what iex did to start out with, which was this coil of fiber. It introduced 350 microseconds of latency as you're before your order could get to the iex matching engine iex and - and, as i mentioned earlier, i worked with iex uh in the its very earliest days before it was ever a stock exchange. I helped both on the technology design side of things as well as sort of thinking through how high frequency works and how high frequency traders interact with exchanges and ways to mitigate some of those speed. Advantages uh that other exchanges had sold to high frequency traders, and so you know citadel did not like any of that.

They did not like any of the protections that iex offered against latency arbitrage, so latency arbitrage. If is what basically flash boys describe, so the book flash boys, which was published in 2014 by michael lewis, described um both the establishment of this very fast fiber optic line between new york and chicago called the spread networks line, as well as the development of iex And the the sort of saga of the the fight to build an exchange that was focused on long-term investors versus high-speed traders and latency arbitrage is basically when high-frequency trading firms are faster than the stock exchanges and faster than other participants. So there are multiple data centers in new jersey, where the stock exchanges servers exist, and so, if you are a high frequency firm at one of those data centers and an order comes in and you you execute against that order. If your model tells you that that is a piece of an order, that's probably transiting other telecommunications lines to other data.

Centers, you might race ahead of those orders in transit, cancel your orders that are standing sitting at the other exchanges and lift up the offers or drop the bids in order to make those orders pay more uh to execute, and so what latency arbitrage does is it Increases adverse selection on exchanges, it increases uh the cost for institutions for slower institutions to trade, so iex set out to fix that by first introducing this coil of fiber and second creating order types that would use the same equations and models as high frequency trading firms. Right, so if the algorithm that iex built thinks that that price is about to drop just like the high frequency firm thinks that price is about to drop, it will turn your order off and drop it for you, and so originally that was based on a midpoint Peg but it was non-displayed, then it was based on a resting limit order non-displayed. Ultimately they came out with this d limit order, type, which is a displayed order, type um, but it does the same thing i you know. I realize i'm using a lot of jargon here: um i'm trying to be succinct um, but you know i, i think what you need to know is that displayed order.

Types are the orders you see on the order, books and um. What iex did was they? You know so, if you post a bid at ten dollars, uh and their algorithm says hey the price is about to drop, then that bid will drop to 9.99. That's all, and and and and it protects that resting order from those faster high frequency firms and it sort of adheres to this principle that an exchange should be faster than its fastest participants, which is something that no other exchange in the u.s adheres to. So, to sum that up for the the highest level, people, basically iex, has come up with a system where they feel as if they could predict something high frequency traders are about to do and if that's going to be adverse to you, they they fix your order To make it a little bit better so like it they're, basically uh the perfect, it's like a reverse uno card on high frequency traders.

They have the models they're gon na, do it they do it and instead of high frequency traders profiting they're helping people on their exchange, get a better fill or basically like that yeah yeah. I think that's a that's a good sort of high level overview. It's it's! The exchange working to protect its resting orders uh and avoid those super fast orders that are coming in to try and find stale prices um, you know, so what it really is and and citadel's argument against it. You know is that um you know it.

They should be able to basically transact at stale prices. You know they should be able to pick off those resting orders because they can do it on every other exchange. But what iex is trying to say is: no, you know we're reflecting the actual price we just happen to be faster than them, because we've pushed them off. We held them over here while we update the price and then we let them in essentially gotcha.

So with that, though, this has already been, you could use it right now. I believe it's been live for about a year yeah now that um we're filming this, it's been going there for a year, so obviously the sec has previously approved this type of market order. For iex and right now, the court case, the citadel securities suing the sec that they should have never allowed it. And this is where i get confused because it seems like, within the case they were arguing about the definition of instantaneous immediately and they like to throw out the word de minimis a lot.

But in reality it seems like they never made an argument about sec procedures. They just argued about the speed bump that iax has so to me it was a poor legal case, but i'm not i'm not a lawyer folks. So, like i've barely watched all his suits. So don't take that as legal advice or anything, but did that confuse you at all? It did and again same here, not a lawyer, not even close, but my understanding is that, just because a regulator does something you don't like doesn't mean you can appeal it.

The only thing you can appeal is: did they go through, as i described earlier, the prescribed process for uh putting the proposal out there receiving the comments, reviewing the comments, doing their analysis and coming up with a solution um. If you think that uh, the regulator didn't do that that this decision was arbitrary and capricious which is the legal standard which means like you know, gary gensler was like. Ah i hate ken griffin approved stamp, you know like, then you can sue them. If he didn't do that, you really don't have a leg to stand on and you know so.

The lawyers that i did talk to you know they all pretty much told me and 99. This is an sec and iex win. Um and again i i i'd like to mention that you know what we as i described, latency arbitrage, and i said it was how you know what was described in this book flash boys when flash boys came out in 2014, the entire industry mobilized against it and The entire industry came out all of wall street and said there is no such thing as latency arbitrage. This is a book of a work of fiction.

This does not exist and lo and behold, seven years later, the citadel lawyer admitted that latency arbitrage existed. He tried to say not now but 10 to 12 years ago sure, but that was the first time any major firm had admitted late, sea arbitrage existed and the sec came out and admitted latency arbitrage existed, so it was from that perspective, even though the court case Is probably an open and shut case? It was extremely uh exciting for those of us who had been talking about this for many years to finally hear uh. You know these people saying yes, okay, we see it wow. It almost seems to be in that same vein of thought of in 20 2004 you had a citadel arguing payment for order flow is extremely bad.

We shouldn't use it. It will be detrimental to our wall street system and now they're, obviously defending it. It makes them billions of dollars a year, but, like i find it so funny of uh, mr ken griffin he'll go on tv and say what's his argument, he's like just tell me what side of the road to drive on i'll drive on it. Well, yeah that, like i, don't think he's that willing to back down because it's such a revenue generator for him and if he was so willing, if he was so just mother teresa, altruistic i'll, just drive on the right side of the road.

At that point, why not just do it when there's a legit, he has the data. He knows what he's doing, but yet he'll just go on tv and say his piece, i'm like! Oh, no, i'm fine just tell me what to do well, if you're that fine with it, i don't see why people like uh senator toomey are trying to protect it. Then the dude just admitted he's fine with driving. However, he wants uh man.

Super super strange everything. That's going on right here, but um for sure it is cool to know that, hopefully, in the near future, we're gon na get the next step in whatever this like legal, social, cultural battle is so uh i mean before i know we should have never held our Breath with the sec or anything that they're doing but fingers crossed, because that's all we can really do, but, as that goes, i i 100 agree with you that our movement, the apes, like we got to make our voice being heard, whether it's just otc not for Me showing up listening to these court cases clearly with millions of people, it's a gigantic megaphone and i don't know i'm feeling optimistic, uh, cautiously optimistic, but let's see how this all ends up playing out. Obviously, as it develops, i'm more than excited to bring you back on your twitter is going to be under you, this entire interview. So if people want to follow, you stay up to date with what you are or aren't saying, follow that on twitter also, i know you've been involved with your project terminal guys.

You got to check that out. We've discussed it in more detail previously, but one of the biggest issues being a retail trader really is our lack of quality data and that's exactly what mr lowers project is attempting to fix. It's trying to give us actual useful information, uh akin to what institutions have uh. Is there anything you want to say to the group before we? Let you go today? No, that i think that was you said it great, and you know i yeah.

I agree. I think that this movement can really make a difference, and you know i'm thrilled that people are interested in hearing what i have to say and uh. You know i will keep saying it and uh yeah, like you said, the terminal is our attempt to to try and fix part of the system, and you know we're also in the midst of a crowdfunding campaign, so you can actually invest and own a piece of It you know we we really um that that's the model that we wanted to adopt was to give the community equity in the company, and so, if yeah, if you go to my twitter page, it's the pin tweet, you can check it out and uh. That's it.

Just happy to be here - and you know happy to come back uh to keep talking about this thanks, matt yep. We really appreciate your time and we'll be talking soon have a good one. You.