[HN Gopher] Launch HN: OneChronos (YC S16) - Combinatorial aucti...
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Launch HN: OneChronos (YC S16) - Combinatorial auctions market for
US equities
Hi HN--we're Kelly and Steve, co-founders of OneChronos
(https://www.onechronos.com). OneChronos is a "Smart Market" for US
equities--meaning we match counterparties using mathematical
optimization instead of classical human auctioneer mechanics [1].
Our flavor of Smart Market--combinatorial auctions--lets users
enter orders spanning multiple securities and specify matching
preferences way beyond just price and quantity. We didn't invent
Smart Markets or combinatorial auctions. Roughly $1T/year flows
through them in industries ranging from display advertising to
telecommunications. The underlying theory was the subject of the
2020 Nobel Prize in Economic Sciences [2]. We're bringing them to
capital markets, and we have both the customers and the regulatory
clearance to do so. Our initial user base contains the household
names cumulatively responsible for [?]70% of US equities trading
volume. Today's market structure costs institutional investors at
least a trillion dollars annually. We'll go into the details below,
but the big thing to understand is that mutual/pension/sovereign
funds, 401K plans, and ETF managers pay the price, and ultimately
it gets passed on to households. Given diverse investment time
horizons and risk preferences, capital markets are not a zero-sum
game, but the existing market structure makes it one. Any form of
market friction that prevents mutually beneficial trades from
happening is an economic loss. Our goal is to make a lot more
mutually beneficial trades happen. We started working on
OneChronos as experienced traders and auction theorists. Even so,
getting here has taken five years of iterating with customers,
tackling two deep tech problems, and working through an involved
regulatory process. We'll describe what's causing existing market
friction, the solution, and why that solution is a significant
technical lift. When people hear about market friction and hidden
costs, they usually think about low latency technology, market
data, exchange fees, and predatory HFT practices. Those are
significant, and yet they are rounding errors compared to others.
The principal sources of market friction that we're attacking are
bidders' inability to express economic complements (things that are
worth more together than separately), substitutes (things with
diminishing marginal utility that are replacements for each other)
and non-price factors, and game-theoretic incentives against
bidding "truthfully"--that is, against specifying how many units of
a good you have and the highest price at which you'd buy or the
lowest at which you'd sell them (your supply and demand curve). The
most commonly proposed market structure "fixes," like single good
periodic batch auctions and the IEX speed bump, don't address any
of these. Imagine that a buyer values two goods A and B at $10 for
the package, but only $4 for each individually since they're
complements. Similarly, a seller might unload the package for $8
while demanding $5 for each good individually. Both agents have
"exposure risk" if A and B are bought and sold separately--they
might get stuck with an incomplete package. No trade happens if the
risk is high enough (buy at $4, sell at $5, no cross). But if they
can trade the package atomically, there's a mutual win of $2 in
gains from trade. Similar missed opportunities happen if agents
only want A XOR B or have different prices for different
counterparties (price discrimination). This game of imperfect
information and missed opportunities plays out every day in capital
markets globally. The straightforward solution to these problems
is called "Expressive Bidding"--the ability to communicate
parametric bids to the auctioneer, e.g., buy at most one of {$10
for A and B, $4 for A, $4 for B} or sell at most two units of A,
pricing it at $10 for counterparty C_1, $9 for C_2, or $8 for C_3.
Given everyone's Expressive Bid and a well-chosen objective
function, the auctioneer uses constrained optimization to clear the
market and unlock efficiencies. Awesome. So why didn't this happen
when markets first started going electronic? General combinatorial
auctions are isomorphic to weighted set packing. Clearing them is
an NP-complete optimization problem. Finding feasible and near-
optimal solutions at the speed and scale of capital markets is deep
tech problem #1. Furthermore, bidding in combinatorial auctions can
be challenging in both a computational and UX sense. Making it easy
is deep tech problem #2. We tackle problem #1 similarly to how
game AI like AlphaZero and optimizers like AlphaFold work. The
combination of deep learning, heuristics, and classical AI search
techniques is powerful, and applying them to combinatorial auctions
in novel ways is a core part of our IP. Problem #2 involves the
magic of formal methods. Expressive Bidding users submit snippets
of code (a functionally pure subset of OCaml/ReasonML) called a
Proxy Bidder. These proxies are essentially functions mapping
"proposals" (allocations of goods) to prices, e.g., f({2A, -B}) -
-5, meaning that the bidder wants $5 for buying two units of A and
selling one unit of B. Using formal methods, we turn Proxy Bidders
into Expressive Bids that our optimizers can understand. You can
see what that looks like here [3]. This approach is dead simple for
end users, but it took years of collaborative R&D with our friends
and formal methods legends at Imandra [4] to enable. Not everyone
needs to write or use Expressive Bids. For common use cases, we're
offering pre-canned/forkable Expressive Bids for things like pairs
trades and factor neutral portfolios. That aside, users who don't
use Expressive Bidding still benefit from those who use it and
create unique liquidity that doesn't exist on other trading venues.
Our economic mechanism prevents "dark forest" scenarios in which
Expressive Bidding has adversarial uses that detract from overall
match quality. "Power users" can only benefit those who treat us
like a vanilla trading venue--and each other. We make money by
charging a small commission in line with other venues ($0.0009) on
each share traded. Longer-term, we're excited about a pricing model
that balances computational resources used against liquidity
contributed and compensates OneChronos based on how much value we
add. Specifically, we'll measure how much notional dollar price
improvement we generate for the market beyond what's generated by a
"vanilla" double auction that we run in parallel (a neat trick
enabled by Expressive Bidding-we can run an arbitrary number of
auctions with different rulesets in parallel to measure relative
performance). This approach aligns our incentives with our
customers and eliminates fixed costs (which cause market friction)
from trading. Only FINRA registered broker-dealers connect to
OneChronos directly. If you work at one, and you're not yet a
subscriber, please get in touch. We love talking to both
subscribers and their customers, and we'd love to hear from
institutional investors looking to leverage OneChronos through
their existing broker algo and DMA workflows. Retail customers will
eventually access us through brokers that choose to allow it (PFOF
is its own thing). In the meantime, stay tuned for other more
decentralized asset classes :) You can reach us at info (at)
onechronos.com. And we're hiring! If you're passionate about
deeply technical problems ranging from mechanism design to applying
ML to combinatorial optimization to writing compilers and
engineering sophisticated distributed systems to HFT tolerances,
get in touch -- careers (at) onechronos.com. Steve and I will be
online today and would love to talk about our technical challenges,
auctions/mechanism design, market structure, and the future of
OneChronos. [1] https://en.wikipedia.org/wiki/Smart_market [2]
https://news.stanford.edu/2020/11/19/bid-picture-nobel-prize... -
Paul Milgrom, one of the laureates, is the Chair of OneChronos
Labs, our research arm. [3]
https://www.onechronos.com/docs/expressive/bidding-guide/#in...
[4] https://www.imandra.ai/
Author : lpage
Score : 147 points
Date : 2022-02-07 16:36 UTC (6 hours ago)
| zitterbewegung wrote:
| What is your SLA for an expressive bid? I'm guessing it its less
| than 1ms?
|
| Do you use a database of some sort?
|
| How do you to handle settlement?
|
| How do you handle ingest?
| lpage wrote:
| > What is your SLA for an expressive bid? I'm guessing it its
| less than 1ms?
|
| The optimization procedure (which includes bid evaluation) is
| ~30ms. We cycle bound (under a formal model of computation via
| function application and graph reduction) computation of
| bidders to ensure that everyone shares an identical and
| deterministic resource cap.
|
| > Do you use a database of some sort?
|
| Not as part of the real-time trading system, which operates as
| a CP fail-stop distributed system model checked for safety and
| liveness by TLA+ and system tested by Jepsen.
|
| > How do you to handle settlement?
|
| Regular way (T+2 settlement with a 3rd party clearing BD)
|
| > How do you handle ingest?
|
| We use a constellation of GPS synchronized Stratum 1 clocks and
| proprietary network timestamping software + hardware to ensure
| that we process orders entered by the auction call time
| regardless of what physical host we receive the order on. We do
| the same for market data broadcast from other trading venues
| across data centers and geographies. We stream both market data
| and orders to a central point for processing. Every node in our
| distributed system that processes orders or "away venue" market
| data broadcasts a "Gateway Call Announcement (GCA)" message at
| auction call time to downstream compute nodes that run the
| auction. Auction solver nodes get to work after receiving GCA
| messages from the hosts they expect to hear from.
| zitterbewegung wrote:
| Could you use something like this to not rely on Stratum 1
| clocks or have this as a backup?
| https://www.datacenterdynamics.com/en/news/facebook-
| creates-...
| lpage wrote:
| We're following the project with interest, but for now,
| we're focused on directing engineering resources to other
| portions of the stack. FWIW our approach is in the low
| nanos of precision and accuracy, which puts us within
| spitting distance of the Nyquist criterion for never
| aliasing two packets to the same timestamp (thus losing a
| total ordering) at line rate 10G. That's massive overkill
| for our purposes (auctions 100ms apart), but it's a
| satisfying property nonetheless :)
| zitterbewegung wrote:
| Well other than GPS being unavailable right ?
|
| Another question are your looking into having same day
| settlement?
| sjbase wrote:
| Since the GPS signal is just disciplining a local
| oscillator, it would have to be a sustained outage before
| drift starts to really matter. But yeah there is a point
| where it would make a difference.
|
| > Same day settlement
|
| This one is outside our control for the moment - we
| partner with a 3rd party for clearing and settlement, and
| would depend on our subscribers also making the switch to
| same-day.
|
| Once we get into other asset classes, fast settlement is
| definitely of interest. Some cool stuff we could do with
| incorporating settlement instructions and/or counterparty
| risk constraints as part of the expressive bidding
| language.
| bruceb wrote:
| This is part of the reason I come to HN. A detailed post on a
| problem (and sometime solution) I am unaware of.
|
| A newbie question. I understand how a pair tickets to say the
| superbowl would be more valuable than a single ticket, people
| want to go with their friend. Is there a practical example for
| equities? I will buy 100 shares $FB at $250 only if I can also
| get 50 shares of $SNAP at $35 at the sametime? If I can't get
| that combo, I will only pay $240 for $FB?
|
| Is this aimed at equities that have less liquidity?
| xxbondsxx wrote:
| The founders can answer better, but a lot of traders are not
| just looking at individual stocks but rather _packages_ of
| stocks together.
|
| Say you want to invest in the health + tech space, but there's
| some risk that covid ends and gyms come roaring back. So then
| you want to minimize the risk by putting some money in the gym
| industry as well -- getting an entire package of peloton,
| apple, and 24hourfitness stock is actually worth more to you
| than the individual stocks on their own.
| lpage wrote:
| Great question! Complements in capital markets typically aren't
| as strong as other markets like event tickets. On the
| complements side, hedges are a good example. Market makers like
| banks are willing to quote much larger sizes for hedged
| transactions, e.g., an institution that wants to buy a large
| block of equity in one company while selling others with
| similar qualities as "factor hedges." The net notional changing
| hands is roughly the sum of the parts. Still, there's a big
| price difference between doing this trade atomically and as a
| series of transactions where the market maker has to "wear" the
| risk for some period.
|
| Substitutes in capital markets are ubiquitous. There might be
| hundreds of candidate hedges in the example above, but given
| how trading workflows are, there's no way to communicate that
| amongst market participants. A market maker has no way of
| knowing if someone wants to buy SNAP (and thus potentially has
| market-moving information about it) or if they're using it as a
| hedge for a short position and would substitute something that
| the market maker wants to gross down on (and offer a more
| aggressive price because of that). As such, market making is a
| game of pricing under risk and uncertainty. Combinatorial
| auctions eliminate much of the uncertainty.
| vagabund wrote:
| Do you envision scenarios where this new expressiveness is
| used in strategic but not market efficient ways? For
| instance, in the SNAP example, presumably the correlate to
| price improvement when purchasing as a substitutable hedge is
| a price premium when purchasing a specific equity, as market
| participants can deduce -- in a way that they previously
| could not -- that there's something inherent to SNAP that one
| (or the market) values. I don't know if it's possible under
| the mechanics of your ATS, but this seems to produce an
| incentive to obfuscate such a purchase of SNAP specifically,
| potentially in ways that detract from market efficiency. Am I
| off base? To put it more generally I wonder whether this
| higher dimensionality might not lead to more sophisticated
| game-theoretic posturing, rather than less.
| lpage wrote:
| This is a great question, and the full answer involves lots
| of mechanism design nuance. The short answer is that we
| have uniform clears per trading instrument, and bids are
| sealed, so there's no direct signaling game that would
| allow someone to try to pass off an alpha trade as a hedge.
| We plan to introduce a mechanism that will enable signaling
| through tokens (opaque identifiers). Bidders can attach
| whatever token they want, and other bidders can price
| discriminate against tokens (change their prices for,
| refuse to trade with, trade exclusively with) based on
| historical post-trade outcomes that we make known via an
| immutable audit trail. Participants can create and use
| tokens freely, so it's not segmentation. Instead, it's a
| means of inducing a repeated play game and a market for
| reputation.
| renewiltord wrote:
| Do you do only equities or also derivatives?
|
| This is very interesting. Because you run frequent short
| auctions, there's no strict long-running orderbook here, right?
| Are you using FIX for your protocol and where are your servers
| geographically located?
| lpage wrote:
| > Do you do only equities or also derivatives
|
| Initially we're US equities only. Stay tuned for other asset
| classes and geographies. Spot vs derivatives is a core use case
| that we want to do as soon as we can (only national exchanges
| can do listed derivatives trades, so it's a big lift).
|
| > there's no strict long-running orderbook here, right
|
| The default good-till behavior is one auction cycle (100ms
| Poisson random back-to-back).
|
| > Are you using FIX for your protocol
|
| Yes! And, we have a formal model of our FIX spec and self cert
| flow that makes onboarding us way easier of a process than
| what's typical [1]
|
| > Are you using FIX for your protocol and where are your
| servers geographically located?
|
| Initially, just Equinix NY5. Longer term, we plan on PoPing at
| most financial data centers. We use a constellation of GPS
| synchronized Stratum 1 clocks and proprietary network
| timestamping software + hardware to ensure that we process
| orders entered by the auction call time regardless of what
| physical host we receive the order on. We do the same for
| market data broadcast from other trading venues across data
| centers and geographies. We stream both market data and orders
| to a central point for processing. Every node in our
| distributed system that processes orders or "away venue" market
| data broadcasts a "Gateway Call Announcement (GCA)" message at
| auction call time to downstream compute nodes that run the
| auction.
|
| [1]: https://www.onechronos.com/docs/fix/fix-42/
| renewiltord wrote:
| Thank you for your answers.
|
| Exciting stuff. And love your docs.
| RandomLensman wrote:
| Loved this from the first time I saw it some years back (became
| part of my example list of innovations out there)! Finally, some
| advanced auction mechanisms going broader.
|
| From the description above: are you guys then just selectable as
| an algo/ATS going through through a broker, i.e, there could be a
| natural "sweep" (bit like algos covering block interest in some
| cases)? Do you work with some big broker-dealers on integration?
|
| I know you started out with equities, but bond portfolio
| transitions are (often) a much bigger pain - any plans there? Or
| issuance, i.e., mix of funding instruments in one go?
| lpage wrote:
| > are you guys then just selectable as an algo/ATS going
| through through a broker, i.e, there could be a natural "sweep"
| (bit like algos covering block interest in some cases)?
|
| Yes. Some brokers are incorporating us into their algo suite,
| others are offering us as a direct route, and most are doing
| both.
|
| > Do you work with some big broker-dealers on integration?
|
| Yes! We're excited to be launching with many of the household
| names, and most have plans to connect by early H2. We'll be
| updating our website with a list of launch partners in the
| coming weeks as part of our full launch announcement (the HN
| fam is hearing it first).
|
| > I know you started out with equities, but bond portfolio
| transitions are a much bigger pain - any plans there? Or
| issuance, i.e., mix of funding instruments in one go?
|
| Getting to this world state is our real passion. Imagine a fund
| manager running a cross-geography equities and a credit book.
| Any trade they want to do will involve rates and currency risk
| on top of the actual delta. We want to make it easy to, say,
| sell some European debt issuances in euros to fund a US
| equities position in dollars while re-hedging curve risk, all
| as part of one atomic and frictionless transaction with a pre-
| trade known cost basis.
| RandomLensman wrote:
| Thank you! I reckon the fully integrated world also will need
| some sort of "darkness" layer (in parts) to not warp
| liquidity and quotes too much for the less liquid things -
| but I can see the tech and algorithms for that being there
| already , just not used much.
|
| Looking forward to reading the full launch announcement!
| xxbondsxx wrote:
| For those who want a rough programming analogy here -- this
| sounds like support for multi-row transactions in a SQL database
| where only single row edits were allowed before.
|
| Now you can describe "buy goods A and B at $10 maximum, commit"
| and have the transaction either succeed or fail. Before you had
| to edit those rows individually and there's risk that you end up
| in a weird partial state, hence having to lower your bid to cover
| your risk.
|
| Really exciting tech and it'll be great for these costs in
| market-making to be eliminated!
| lpage wrote:
| Love that analogy--thanks! Combinatorial auctions are in large
| part about ensuring atomicity. Traders call it legging risk.
| Auction theorists call it exposure risk.
| sjbase wrote:
| Thanks! :) good analogy and spot on about the market-making
| costs - hedging atomically as an EMM could unlock quite a lot
| in the way of liquidity.
| grvdrm wrote:
| Gents, congrats on your launch from a friend in NYC! Have loved
| hearing about this despite understanding way less than you do
| about the markets, their problems, and your product. Glad to see
| you charging forward!
| sjbase wrote:
| Thanks! It means a lot knowing people are out there rooting for
| us :)
| lpage wrote:
| Thank you!
| polskibus wrote:
| Finally, something truly new, taking care of complexity for
| businesses for a win-win scenario, not aiming at buying users in
| batches with VC money and tracking them for life. I appreciate
| you being humble and honest that it is an application of known
| methods to a different problem. Good luck, let us know how to
| follow you for your latest achievements.
| lpage wrote:
| Thank you! We really appreciate that. We're happy to be working
| on something that has already worked incredibly well in other
| domains while facing major technical blockers against use in
| ours. It gives us a clear, albeit challenging, problem to
| tackle.
| quantum_state wrote:
| It is good to see methods routinely used in collateral trade
| matching found their way to close to real time exchange trade
| matching ... though the former is a problem of a much larger
| sizes ...
| lpage wrote:
| The notional values in compression cycles are insane, and we're
| interested in the post-trade space as well. The optimizations
| done on the post-trade and funding side _aren 't_ combinatorial
| auctions, resulting in efficiency loss and poses workflow
| challenges, especially for swap and CDS traders. That said, the
| opportunity for driving actual portfolio gains and not "just"
| minimizing counterparty and systemic risk is more significant
| on the pre-trade side.
| monkeydust wrote:
| Trying to get a feel for how much liquidity you need to
| successfully execute on the complex expressive orders that might
| tie in multiple securities... Is it common that these types of
| orders run for many auctions, day, days or more to be fulfilled?
| sjbase wrote:
| Excellent question! The TL;DR is that substitutability and the
| ability to manage risk (e.g. execute hedges or constrain factor
| exposure atomically) can be great for inducing liquidity in the
| absence of large volume and high turnover.
|
| On substitutability: if you want to sell $2m of some sector
| basket you wouldn't put in a limit order for $2m in every
| security (overfill risk). An expressive order can enforce a $2m
| global constraint across the basket but show full size in each
| security. When lots of people are doing this, it solves the
| "ships passing the night" problem where people are looking for
| offsetting exposure at a high level but can't express anything
| but single stock orders.
|
| On risk management: some constraints certainly are restrictive,
| e.g. conjunctive constraints like 'a' AND 'b' AND 'c'. It would
| be very unlikely that we find the exact opposite of that
| constraint, so the auction is multilateral: we can stitch
| together the contra with individual single orders for 'a', 'b',
| 'c'. Key to the liquidity aspect of this is our objective
| function: it rewards more aggressive pricing and larger
| quantities. So the principle here is that by gaining atomicity
| (and reducing uncertainty) people can be more aggressive on
| price and qty. This is especially important for liquidity
| provision: how much larger size could market makers quote if
| they could automatically hedge new positions they enter into?
|
| All that said, bootstrapping liquidity is the hardest part of
| any venue launch. We're obsessively focused on making sure we
| have the right blend of participants trading on different
| horizons for a healthy pool.
| josh2600 wrote:
| Is this only effective at small scale? Many of the biggest hedge
| funds in the world that do high frequency make money by
| effectively front-running the book. If you are executing these
| trades across exchanges I don't see how you don't get front-run
| by HF firms.
|
| This is the same problem eth et al are dealing with in crypto
| swaps due to Miner Extracted Value (reordering the tx in the
| block to favor miners extracting value by front running trades).
| sjbase wrote:
| The funny thing about the emergence of HFT is that if you truly
| only have a hundred or so shares to buy/sell it's quite cheap
| and easy to do that now. Atomicity and substitutability isn't
| as important if there's plenty of liquidity relative to the
| size you're trading.
|
| The harder problem that large traders face is executing blocks
| and portfolio trades. How do you figure out what your total
| transaction cost (market impact / cost of liquidity) will be if
| you're buying 100x the displayed volume? Being able to express
| where you are flexible (e.g. individual security prices) and
| aren't flexible (aggregate price, atomicity) helps lock in the
| uncertainty pre-trade.
|
| So we're actually mostly going after the large scale stuff,
| more than the small scale.
| matheist wrote:
| Can you say more about how you incentivize truthful bidding? I
| understand about exposure risk and expressive bidding but I'm not
| sure if that was meant to obviously imply something about
| truthful bidding which went over my head, or if you meant to not
| say more about it.
|
| I love the part about eventually determining your value-add by
| comparing to a counterfactual vanilla market -- sounds a bit like
| Shapley value? If not _exactly_ Shapley value?
| lpage wrote:
| > Can you say more about how you incentivize truthful bidding?
| I understand about exposure risk and expressive bidding
|
| Both the multiunit dynamics and the specifics of our uniform
| clearing price mechanic minimize ex-post regret. Double
| auctions suffer from the winners curse/adverse selection, as
| limit orders are always "traded through." Multiunit uniform
| clearing price mechanisms like OneChronos can lessen or
| eliminate that by incentivizing buyers and sellers to
| truthfully report aggregate supply and demand curves, and
| Expressive Bidding enables the reporting of supply and demand
| curves (among other things). NB: we are not an IC direct
| mechanism. We are balanced budget and individually rational.
|
| I love the part about eventually determining your value-add by
| comparing to a counterfactual vanilla market -- sounds a bit
| like Shapley value? If not exactly Shapley value?
|
| It's a hot take on both Shapley values and VCG (while avoiding
| the issues with both), and it's about to become an active area
| of research for us!
| throwmeawaysoon wrote:
| i'm not an economist or a game theorist so i don't remember the
| details but this paper talks about how certain market designs
| lead to untruthful bidding
|
| https://www.cs.cmu.edu/~sandholm/vickrey.IJEC.pdf
|
| but in the context of second price auctions.
|
| lpage might be alluding to something having to do with their
| proxy bidder implementation but the above paper actually
| discusses how proxy bidders themselves lead to untruthful
| bidding (so maybe lpage is suggesting their implementation is
| better?).
| lpage wrote:
| VCGs got a real-world test in FB's ad market [1], and the
| results were mixed. VCG is in a class of theoretically
| interesting but fragile and overly game-theoretic mechanisms.
| Our mechanism is boring from a mechanism design standpoint--
| it's a uniform clearing price periodic auction without any
| cleaver demand reduction or tricks aimed at incentive
| compatibility. The complexity of what we allow for with the
| bidding language makes closed-form/theoretical analysis at
| best difficult and, in cases, impossible. Instead, we focus
| on giving traders a direct means to express their valuations
| and mechanism that minimizes information leakage and post-
| trade regret (situations where a bidder wishes they'd behaved
| differently given the auction's outcome).
|
| [1] https://www.researchgate.net/profile/Alexander-Leo-
| Hansen/pu...
| itaimonster wrote:
| Congrats on the launch! This is super interesting. Expressive
| bidding also opens up opportunities for arbitrage, do you see any
| potential downsides to this aspect of the market behavior?
| lpage wrote:
| Good question! Combinatorial auctions with a uniform clearing
| price eliminate mechanical arb; there's no opportunity to buy
| and sell a single trading instrument at different prices. Stat
| and funding arbs form "outside" of trading venues and they're a
| good thing that keeps the market efficient. Putting a
| combinatorial auction in the mix eliminates friction and entry
| costs for folks providing liquidity (no steep tech costs) and
| keeps the process competitive.
| igorkraw wrote:
| I sent you an email, but all I can say is please come to
| Switzerland so I can work with you guys :-) Everything I've seen
| so far looks quite awesome.
|
| Two questions:
|
| 1. Are you implying you are using deep learning heuristics for
| weighted set packing? Assuming you can't share too much about
| your IP, did you have a regulatory or business need to deal with
| worst-case performance guarantees and (how) did you manage this
| if you did?
|
| 2. It sounds like a lot of your stack is OCaml (I'm a fan, 2nd
| most fanboyed language after Rust and it's a pity it's not more
| used), is this a deliberate choice or a "grew out of a research
| project in formal verification where they like ML" consequence?
| mushufasa wrote:
| This seems like really deep technology. What is the one sentence
| describing who would use this and why though? Maybe that's in the
| long block of text somewhere.
|
| I work in fintech for broker dealers so I'm genuinely curious
| what is the use case here.
| lpage wrote:
| > This seems like really deep technology.
|
| That it is!
|
| > What is the one sentence describing who would use this and
| why though?
|
| Today's market structure costs institutional investors (and by
| extension households) at least a trillion dollars annually (and
| Smart Markets hold the potential to eliminate that loss).
| jpthurman wrote:
| >Who would use this and why?
|
| This isn't clear to me - are your buyer's institutional
| investors? Are they buying your technology to create trade
| options for their end users i.e. an individual investor? I
| don't know what an ATS is so I gather that I'm not a direct
| user of your technology - perhaps I would be an indirect
| user? Would E-Trade, for example, leverage your technology to
| provide me with a combinatorial buying option?
| [deleted]
| sjbase wrote:
| An ATS is like an exchange, so we match buyers and sellers.
| And you guessed correctly that the initial users are
| institutional investors - or more directly their brokers.
| So initially we'll have institutions creating and sending
| in "Expressive Bids" to improve their execution
| performance, and to express trades they currently can't via
| plain limit orders.
|
| That said, we'd love to get to the point where E-Trade etc.
| are offering combinatorial bidding to retail traders, with
| us on the back end.
| jpthurman wrote:
| Thanks. Obviously I'm not a direct user of your
| technology and so maybe this is not intended for me but
| if you could translate your "A" and "B" into a hard,
| real-life example that I could understand I would be
| empowered to be an advocate for you. Best of luck to you.
| sjbase wrote:
| No worries, happy to concretize this: the really easy
| example would be shoes. How much would you pay for just a
| right shoe or just a left shoe? A lot less than the pair,
| since you might not be able to find the other shoe in the
| right size, condition, etc. Same with the seller - they
| don't want to be stuck trying offload a single left shoe.
|
| In stocks, A might be a company you invested in and B
| some ETF that you bought as a hedge for A. What if you
| sell out of A, and then the price of the ETF drops?
| There's value in being able to liquidate the full
| position - the single stock plus the hedge - at once.
| mushufasa wrote:
| > Today's market structure costs institutional investors (and
| by extension households) at least a trillion dollars annually
| (and Smart Markets hold the potential to eliminate that
| loss).
|
| What is the subject and the verb for the problem you are
| solving and for whom? This is too vague.
| anonymouse008 wrote:
| Gut reaction:
|
| There has to be a lot of additional data gathered at the time
| of 'intent to purchase or sell' - because otherwise your
| solution eats away a lot of powerful institutions alpha. And
| without 'novelly' expressive orders, there's no new place for
| them to go... that Trillion dollars doesn't just evaporate in
| today's world.
| lpage wrote:
| It's more like ensuring an opportunity to leverage the
| information that's _already_ being gathered. As it stands,
| PMs have to construct concrete portfolios because they need
| to send the trading desk specific instructions on what to
| buy and sell. The portfolio they ship out for execution is
| effectively a low dimensional projection of a high
| dimensional decision process. That process has extensive
| substitutability (sizing and substitutability if something
| is going to be more or less expensive to execute than
| transaction cost models predicted), but there 's no way to
| communicate that in today's trading workflows. That results
| in the market missing out on Pareto outcomes.
|
| We've already seen this in sourcing markets [1]. Capturing
| more information at the time of bidding resulted in massive
| (40-60%) efficiency gains for both sides of the market.
|
| [1]: https://kilthub.cmu.edu/articles/journal_contribution/
| Very-L...
| anonymouse008 wrote:
| Oh yes, I see the problem statement and agree from a PM
| perspective this is quite good.
|
| That said, there are a lot of people who make good money
| making inferences from these current concrete dynamics -
| in some sense, you're just forcing the market to innovate
| (this is good).
|
| I always like to know who I'm asking to change when
| building products -- and this one is a very interesting
| (read: fun and potentially lucrative) set of actors.
| retube wrote:
| > a trillion dollars annually?
|
| lol. source / evidence?
| lpage wrote:
| Fully appreciate that it's a very large sounding but very
| real number once you start unpacking the scale of capital
| markets: https://news.ycombinator.com/item?id=30247693
| retube wrote:
| I am aware how big the markets are. I am also aware that
| transaction costs are miniscule.
|
| By your own data above, if typical fees are $0.0009 per
| share traded, $1tr in costs implies notional value of
| instruments traded each year of approx $1x10^17, assuming
| average price of $100 / share.
| lpage wrote:
| Ah, agreed, but we're talking about two different things
| --direct transaction costs versus allocative
| inefficiency/missed Pareto outcomes. OneChronos is about
| unlocking Pareto efficiencies--situations in which two or
| more parties can trade to mutual benefit. An easy example
| is a (scaled down in price differences, scaled up in
| size) version of the complements example above, e.g., an
| ETF arb trading the basket against the underlying with a
| small tolerance for tracking error. An institution that
| can take the basket or the underlying as a hedge or as an
| investment position can interact with the arbitrager,
| creating economic gains for both parties in the process.
| At institutional scale, efficiency gains measured in bps
| and compounded exponentially add up.
| rwissmann wrote:
| Exciting implementation of a really cool concept.
|
| > Today's market structure costs institutional investors (and
| by extension households) at least a trillion dollars annually
| (and Smart Markets hold the potential to eliminate that
| loss).
|
| How does one get to this estimate? That is ~5% of US GDP.
| Everything else was easy to follow - this seemed high, at
| least intuitively.
| lpage wrote:
| It's a huge number that only makes context when looking at
| the absurd scale of capital markets globally. BlackRock has
| written on the cost of liquidity [1]. Unfortunately, much
| of the institutional research on this topic is in a walled
| garden, so we plan on publishing on this when we have our
| own data. Treating it as a Fermi problem, the market cap of
| US equities is ~50T and 140T notional of US equities traded
| in 2021. The global market cap is 125T (I don't have
| trading volumes there). FICC is much larger than equities.
|
| Portfolio returns compound exponentially, so even small
| inefficiencies matter big time.
|
| [1] https://www.blackrock.com/corporate/literature/whitepap
| er/vi...
| rwissmann wrote:
| You can get to big numbers on global capital markets, for
| sure. I was wondering whether you a consulting/VC-style
| estimate given how specific the statements was: "Smart
| Markets hold the potential to eliminate that loss" of "at
| least a trillion dollars annually".
|
| How do you think about it? Let's say we expect half the
| benefit to come from equities.
|
| >> 0.5T / 125 T = 0.004
|
| >> Smart Markets would need to raise portfolio returns by
| an average of .4% (net of trading costs) annually.
| monkeydust wrote:
| How does this sit with other innovations such as all to all
| trading in OTC markets that are designed to match many
| buyer/sellers at, for example, a mutually beneficial mid
| price?
| lpage wrote:
| The products that still trade predominately {OTC,
| bilateral, non-electronic} do because non-price factors,
| trading conventions, and counterparty risk make it
| difficult or impossible to trade on a central exchange.
| Expressive Bidding and a mechanism that allows for matching
| market dynamics (OneChronos) will enable electronification
| and more active trading in these markets. Ten years ago, I
| would have said that there were commercial headwinds
| against this (dealers wanting to trade bilaterally). With
| banks increasingly focused on repeatable and less variable
| trading revs, such is no longer the case. The unsuitability
| of such products for double auctions is the limiting
| factor.
| throwmeawaysoon wrote:
| poking around on your socials, it seems like you've been building
| for ~5 years, and are just now officially launching, after i
| guess a capital injection from yc.
|
| since the core ip is "deep" as you say, i'm guessing it cost
| quite a bit to develop, unless you built out all of the
| components yourself, which, while possible, seems unlikely given
| the technical complexity of each piece (you, and whoever else is
| on the engineering team, seem smart but this looks like "research
| edge" tech along several dimensions).
|
| so i'm curious whether you paid the development costs up front
| (either using your own money or FFF) or if you validated and
| raised in small pieces. if the latter, i'm curious how one does
| that for such a complex product/service.
|
| lots of assumptions in the above - feel free to disabuse me of my
| ignorance.
| sjbase wrote:
| > capital injection from YC
|
| We raised a series A in 2019 led by Green Visor (who has been
| excellent btw, and with us from the start)
|
| > it seems like you've been building for ~5 years ... i'm
| guessing it cost quite a bit to develop
|
| Yep, you're spot on that it's a complex product. The biggest
| cost has been making it feel for the user like it's not. What
| that boils down to is an enormous amount of iterative feedback
| and development w/ the industry. Between that and the
| regulatory process, a lot of the "cost" has been more duration
| than cash burn. We've kept things lean from the start in
| anticipation of that.
|
| > unless you built out all of the components yourself
|
| We've developed the tech in house, with some hands on help from
| our friends at Imandra mentioned in the OP. On the research
| piece: that's been happening in the background for many years,
| and we're definitely building on the shoulders of giants in the
| worlds of mechanism design, algorithmic game theory, and deep
| learning. We're lucky to have some great academic advisors
| involved (like Kevin Leyton-Brown since the early days) as
| well.
| throwmeawaysoon wrote:
| >We've developed the tech in house
|
| i'm not often impressed but that's quite impressive. kudos to
| you.
|
| i currently work on deep learning compilers (as a phd
| student) but i'm interested in basically all of these things
| (compilers, combinatorial optimization, auction theory). i
| know lpage expressed that you're hiring but i'm curious what
| roles you're hiring for (your careers page is light on
| details).
| lpage wrote:
| We're still a small enough team that we're more focused on
| talent than roles. As an example of what that means, our
| stack is polyglot (rust, OCaml, elixir, python), and we
| don't assume or require that folks have worked in any of
| those languages before. We invest heavily in learning and
| teaching.
|
| It sounds like you have a very relevant background, so
| please email us if you're interested in discussing further!
| doublewale wrote:
| Hey Kelly, Steve. (Wale here). Congrats on the launch!. This was
| a great read!
| sjbase wrote:
| Thanks, and good to see you here! :)
| legutierr wrote:
| Can you talk about the regulatory issues that you faced and had
| to solve before launching?
| lpage wrote:
| We needed to work through the FINRA BD and SEC ATS-N
| registration process, and the latter is a requirement that went
| into effect well after we got started on OneChronos. We're
| pleased with how both went, and we chose US equities as a
| beachhead precisely because of how sophisticated the regulatory
| framework is. That said, it's quite the process, both time and
| resource-wise. We'll have to work through similar processes to
| pursue other asset classes and geographies. Doing so is core to
| our mission of making portfolio level transactions frictionless
| cross-asset and cross geography.
|
| You can read our ATS-N here:
| https://www.sec.gov/Archives/edgar/data/1692652/000169265220...
| totalZero wrote:
| This would be far more impactful IMO for a market where price
| discovery is weak and market access is challenging. For example,
| equities in Mercosur countries.
|
| Very cool regardless.
| lpage wrote:
| > This would be far more impactful IMO for a market where price
| discovery is weak and market access is challenging
|
| We very much agree that the potential is even more significant
| for markets where opacity and price discovery is less efficient
| than US equities. We chose US equities as a beachhead given the
| mature regulatory framework and the extent of market
| fragmentation. Other asset classes and geographies are
| immediate next steps.
| totalZero wrote:
| If you decide to go that route, hire me. I can be useful
| there.
| lpage wrote:
| Please email me! careers [at symbol] onechronos.com
| gbasin wrote:
| This is very cool. In a past life, I built a quant + HFT MM
| trading firm where we did a lot of spread trading. Always thought
| something like this was needed! Good work
| lpage wrote:
| Thank you! That's my past life as well. The impedance mismatch
| between what I knew was possible on the market design front
| courtesy of my academic background and what I did day-to-day as
| an algo trader is part of the origin story. Steve and I want to
| figure out how we could bring Smart Markets to finance so that
| everyone could spend more time on alpha and less time on market
| structure workarounds.
| KiranRao0 wrote:
| Very cool market. This feels a lot like multi-leg option
| execution.
|
| How do you think market makers are going to react to this? It
| makes sense for them to provide a bid/ask on individual series,
| but how do you see them providing liquidity for these more
| complex orders?
| lpage wrote:
| Some EMMs are excited to leverage Expressive Bidding to quote
| more size with less risk. For example, I'll bid 200 shares of
| XYZ @ $10.00 XOR {1,000 shares ABC @ $9.99, -500 shares (beta
| hedge) DEF @ 19.98}.
|
| Folks also plan on using Expressive Bidding to enter other
| business lines that high startup costs or low margin (ex
| ongoing technology costs) previously kept them out of.
| sjbase wrote:
| > Very cool market. This feels a lot like multi-leg option
| execution.
|
| Thanks! And yep, similar but all the way down to the
| venue/match level, e.g. as opposed to a broker taking on some
| legging risk to shield the end investor.
|
| > How do you think market makers are going to react to this?
| Expanding on Kelly's take - the big thing it does for market
| makers is allow them to manage momentary risk. When a market
| maker gets filled on an exchange, they are immediately looking
| to hedge/offload what they took on which involves a sequence of
| transactions.
|
| Here, the hedge is baked in. So for example, they may enter an
| order that looks like "buy and/or sell any mix of these 200
| securities, if and only if the net change in risk (e.g. change
| in exposure across several factors) is within some tolerable
| distance from 0". So that would look like a traditional bid-ask
| spread across a series of symbols, but with a global exposure
| constraint. The key outcome being they can quote larger sizes
| across symbols safely.
|
| NB: the MM doesn't need to know anything about the composition
| of the complex order on the other side. On top of that, they
| may be filling one leg, and a natural or other LP filling
| another etc..
| firstfewshells wrote:
| I will consider myself an accomplished person the day I'm able to
| understand this post :)
|
| No offence but tbh, when I read through this, I felt a deja vu of
| coming across another Theranos. Some super innovative sounding
| complex tech which ultimately turns to be a total dud.
| lpage wrote:
| We're simply standing on the shoulders of giants for this one.
| Paul Milgrom and Bob Wilson, winners of the 2020 Prize in
| Economic Sciences, are responsible for the underlying theory
| and commercialization in other industries. My advisor, Preston
| McAfee, introduced me to the concept (Milgrom's book was the
| auction theory text) and was largely responsible for bringing
| mechanism design to ad markets. Lots of folks are applying
| machine learning to accelerating discrete optimization
| problems, and an advisor of ours, Kevin Leyton-Brown [2],
| pioneered applying it to combinatorial auctions for wireless
| spectrum repacking.
|
| Our value add is mainly a team that understands these fields
| and the extreme nuance of capital markets. That's allowed us to
| generate novel IP and a purpose-built solution.
|
| [1] https://www.nobelprize.org/prizes/economic-
| sciences/2020/sum...
|
| [2] https://arxiv.org/abs/1706.03304
| ycombinateur wrote:
| Is there any way to track the volume of trades currently being
| processed by your exchange? It would be good to be able to track
| this number in order to see at what point it becomes viable to
| take a serious look into trading on your platform.
| sjbase wrote:
| We're still going through integration and test/simulated
| trading with initial set of users so nothing public yet. But
| once we cut over to real cash/equities our volume data will all
| be published through FINRA's site[0].
|
| [0]: https://otctransparency.finra.org/otctransparency/AtsData
| high_derivative wrote:
| How is your team organized? Is it US only or are there
| international/remote roles?
| sjbase wrote:
| The company is US based but we're entirely open to remote work
| especially for engineering, and already have a handful of fully
| remote staff.
| jdhn wrote:
| >Furthermore, bidding in combinatorial auctions can be
| challenging in both a computational and UX sense.
|
| Can you elaborate on how it's challenging in a UX sense? I'm
| curious to know what the challenges are.
| lpage wrote:
| How bidders communicate bids to the auctioneer (the bidding
| language) is a central concern for any auction. It's pretty
| straightforward for unit good auctions (I'll pay $5 for A or
| I'll sell B for $4), but combinatorial auctions involve
| arbitrary packages of goods; the set of all possible bids is
| the powerset of the goods being auctioned. Having bidders
| attach a value to each package is both a computational
| impossibility for anything more than a few goods and a "UX"
| nightmare. For example, a bidder that wants to buy A for at
| most $5 in a market for goods A and B with free disposal
| (meaning you'll take something extra if it's free) needs to
| enter the bid ({A, $5}, {AB, $5}).
|
| Information theory tells us that no universal bidding language
| (there's a representation of any package of interest) is
| uniformly more compact than the power set representation.
| Nonetheless, a good bidding language makes "common" bids
| compact and easy to communicate. We thought about this problem
| deeply and realized that functionally pure computer programs
| mapping proposals (packages of goods) to valuations (how much
| the bidder will pay or would want to receive) are about as
| natural as it gets. There's a direct analog in asking a human
| or a pricing algo for a price in a bilateral trade setting.
| However, our optimizer doesn't know what to do with an
| arbitrary computer algorithm, and exhaustively querying one to
| get the power set of prices out is computationally infeasible.
| However, using formal methods, we can (in the right setting)
| convert a computer program into an equivalent representation in
| a logic fragment called mixed integer real arithmetic. And that
| (via SMT solving) is something that an optimizer can work with.
|
| You can see what Proxy Bidders (the pure functions that create
| expressive bids) look like here [1].
|
| [1]: https://www.onechronos.com/docs/expressive/bidding-
| guide/#in...
| jdhn wrote:
| Thanks for the answer!
| vslira wrote:
| Auctions, deep learning, formal methods and discrete
| optimization, it seems like you got my list of things I want to
| learn and turned that into an amazing solution for a giant
| problem. Congratulations to the team, will be watching from afar
| and rooting for you!
| lpage wrote:
| All of our favorite things as well :)
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