Topic: Consolidated Level II and NBBO (Read 2068 times)

this is an excellent idea. 

I was thinking BitInstant might be in the best position to do something like this...since they already do provide services across multiple exchanges.  It is worth noting that such a service would itself quickly become an exchange (since matching orders that both originate on it's own service would be cheaper than hitting one of the existing exchanges).  Whether it's BitInstant or one of the existing exchanges that implements this, I think they'd quickly gain a lot of volume.

Something like what? Everyone can have a consolidated market depth with a simple script. What we don't have is the ability to issue a buy/sell order and have it filled at the best possible price from any exchange.

I will soon be implementing something like this into the bitcoin markets project.

I also like the idea, but I think it is going to take a while until it happens... For now I would be happy with more volume.

+1

Let the exchanges focus on building a rock-solid exchange.  Brokerages will handle the account balances.  it will lead to a much more secure system.

I've given this idea some considerable thought.

The Bitcoin market is fundamentally different from the equities / futures / commodities markets in that you don't have to pay for a seat on the exchange. This makes it easy for the average trader to get involved, but it also reduces the services typically offered through brokerages, like margin, shorting, etc.

It would be nice if the exchanges teamed up to offer this sort of service, but the only other way I see something like this happening is if we get brokerages popping up. The brokerage would maintain account balances with many exchanges and provide data feeds to their customers with the consolidated order book, etc.

The idea I just described is one of my long term goals for a business I would like to launch, and I'm working on getting the pieces in place to make it happen.

As a side note, it would also be nice for exchanges to offer liquidity rebates to encourage higher volume.

Not really.  The exchanges are independently operated.  However, you can enter a trade and have it filled on the exchange with the best price, without explicitly directing it where to go.  this encourages the exchanges to offer the narrowest spreads and more market depth near the money.

The exchanges need to trust orders coming from each other, and settle up each night for the difference.

For example, during the course of 1 day, Trade Hill sent 25 orders to Mt Gox worth $1,273, and Mt Gox sent 10 orders to Trade Hill for $850.  They settle up the difference of $423 and close out the day.

This happens every day in the equity markets, options markets, futures markets, commodities markets, and forex markets.  It can easily be done, and the benefits to any bitcoin trader and the exchanges are great.  Exchanges get more volume (and fees) and customers always get the best price.

I don't have much experience in this, but isn't this something that people usually do "outside" the exchanges? What you are proposing eliminates arbitrage for example. I also see lots of other complications. For example, the money I have on one exchange would need to be available for all the others. Isn't that just like merging all exchanges into a big one?

To really take bitcoin exchange to the next level, we need to ensure that buyers and sellers are getting the best price.  This is accomplished every day in the financial markets using consolidated level II, and the National Best Bid and Offer (NBBO)

How it works:

- Customers can have an account at any brokerage firm (Ameritrade, Schwab, E-trade, etc).  
- Brokerage firm is obligated to ensure the order has the funding in place to back it up.
- Brokerage firm is obligated to fill the order at the best possible price, on any exchange.
- Exchanges accept orders from each other and settle up the net difference each night.

Now this is a good thing.  It means if I want to buy 1000 shares of AAPL, I can enter an order with my broker, and they split up the order and route it to get me the best prices.  I don’t have to look around.

This requires a consolidated Level II Market Depth of all exchanges to be merged into one table.  Here's an example I recently grabbed of AAPL on my Ameritrade platform:


 
The MPID is the Exchange where this order is sitting.  So this table consolidates the open orders near-the-money from Nasdaq, ArcaX, and other exchanges.

The NBBO is the highest bid price and the lowest offer price on any exchange.  This is called the Level I, and only contains the highest bid (and order size at that bid) and the lowest offer (and order size at that offer).    Using the Example above, the Level I for AAPL, which is the NBBO, would be

Bid – 391.01
Ask – 391.13
Bid Size - 100
Ask Size- 1100

This is the Level I quotes that are used for a general snapshot of a stock.

Also, there is a Level III, which shows all the details about each individual order.  But no one really uses that except the exchanges themselves.

What bitcoin needs is a consolidated Level II like this chart above, to pull in the market depth from all the exchanges.  Once you get that in place, exchanges need to automatically route an order (and split it if necessary) to the proper exchange for execution.   Exchanges would need to trust orders coming from each other.

This will ultimately benefit the exchanges and everyone who uses them, by bringing tighter spreads and more volume.