Machines and Markets:
The Island Matching Engine and the Inversion of Finance
Donald MacKenzie
Based on joint paper with J-P Pardo-Guerra
Noon, 20 Oct 2011, 1 Central Park West
Josh Levine
‘we need to highlight the creation
and assemblages of Spacing(s),
Timing(s) and Acting(s)’
(Jones, McLean and Quattrone, ‘Spacing and
Timing’, Organization, 2004)
How US shares were mainly traded in the early
1990s:
New York Stock
Exchange:
Specialists and
brokers
NASDAQ:
Broker-Dealers
& telephones
How US shares (and many other assets in
other countries) are traded now:
How US shares (and many other assets
in other countries) are traded now:
Island, 1996-2002
Sources:
Documents (e.g. source code of Island matching engine;
messages to WATCHER users, March 1995-Dec 1997)
Email ‘interview’ with Josh Levine
Interview with Matt Andresen (CEO of Island from 1998)
Interviews with six former Island employees
Part of larger corpus of 93 interviews with high-frequency
traders, other specialists in electronic trading, exchange
staff, etc.
Innovation is bricolage (qv
misinterpretations of ‘performativity’)
Machines (Island matching engine) help
shape markets
ANT ‘inversion’: scales aren’t fixed;
micro can become macro and vice
versa; content and context can switch
Path-dependence (in QWERTY sense)?
SOES, NASDAQ’s Small Order Execution
System. Compulsorily executable against
broker-dealer quotes from June 1988.
‘SOES bandits’ eg Datek, Broadway
Trading, 50 Broad St. ‘You did it again,
I’ll fucking kill you!’ (Patterson 2012: 87)
Island ‘like most code in the world, more
evolved than designed’ (email from Josh
Levine, 21 May 2012)
FREDY: audible warning when NASDAQ order executed
MonsterKey: programmable macros to speed order
entry into SOES.
Watcher: began ‘as just a program to watch for
incoming executions and keep track of a trader’s
position’ (email from Levine, 27 Jan 2012); evolved into
full-blown trading system.
Island evolved from ‘Customer to Customer Jump’
trades on Watcher.
‘you see 4000 shares for ZXYZ for sale at 22 ½ on
Island and you want to buy stock at 22 ½ … You would
press <Shift 2> to enter an order to buy 1000 shares
(2 lots of 500). …Want to buy 2000 shares? Just press
<Shift 2> twice. Fun.’ (WATCHER News Frame, 16
February 1996)
Island ‘cold rice and rat meat’ (Andresen interview)
Coppola, Apocalypse Now: ‘Charlie didn’t get much
USO. He was dug in too deep, or movin’ too fast. His
idea of a great R&R was cold rice and a little rat meat’.
Matching
‘Bids’ to buy
‘Offers’ to sell
↑
$7.78
$7.77
$7.76
$7.75
192
500
1500
1300
$7.74
$7.73
$7.72
$7.71
↓
400
1091
800
488
‘we were the first group [generation] of people
who grew up with PCs and didn’t think you needed
a mainframe to get something done.’ (Interview
with former Island programmer, 1 May 2013)
Multiple cheap PC CPUs, and Mold (‘built out of
UDP to provide a reliability layer’)
UDP: ‘no handshake … you just kind of blast data’
(interview, 1 May 2013)
ITCH: feed disseminating all changes to order book
OUCH: protocol for computerised order entry
Island matching engine didn’t write to disk, no
delays for two-phase commits.
‘enter2order’ procedure: if possible reuse record in
cache of recently cancelled order (Josh Levine,
‘Island ECN 10th Birthday Source Code Release!’,
available at www.josh.com)
Levine essentially sole programmer
of first version of Island matching
engine; later rewrites kept same
architecture.
In other cases, writing a matching
engine much more cumbersome
organisational task.
Island matching engine latency:
2 milliseconds
(Qv Instinet engine: 2 seconds)
Low latency facilitates ‘electronic
market making’: posting bids
and offers, earning ‘spread’.
‘Bids’ to buy
‘Offers’ to sell
↑
$7.78
$7.77
$7.76
$7.75
192
500
1500
1300
$7.74
$7.73
$7.72
$7.71
↓
400
1091
800
488
2 millisecond matching engine latency makes
spatial distance salient: eg 10 millisecond
delay between Kansas City and 50 Broad St.
‘We were excluded because of the speed of
light’ (Dave Cummings, founder Tradebot,
quoted in Wall Street Journal, 15 Dec 2006)
From 2002 on, Tradebot and other
automated trading firms co-locate at 50
Broad St.
With low fees, ‘rebates’ (small payments to those
who post orders that later are executed against)
and ultra-fast matching, Island becomes formidable
competitor to established exchanges.
2000: Datek sells Island to Bain Capital.
2002: Bain sells Island to Instinet.
2005: NASDAQ buys Instinet’s US business.
Technologically, NASDAQ comes to resemble Island
(ITCH, OUCH, matching engine in Levine style).
New York Stock Exchange buys and in part comes
technologically to resemble Archipelago (Chicagobased new trading venue).
The ANT inversion:
Island starts ‘micro’, shaped by existing institutions,
esp NASDAQ. Feb 1998: 4 Island employees.
By 2008 Island’s features (low fees, rebates,
electronic order book, fast matching engine,
colocation) become effectively compulsory, because
all share-trading venues have to attract electronic
market makers. This is now the ‘macro’ context
within which institutions (eg New York and London
Stock Exchanges) have to operate.
Key vehicle of inversion in Europe: Chi-X, new
electronic trading venue set up in 2007, with
matching engine written by 2 Island programmers.
Path-dependence?
Are the features of Island a ‘trans-historical’
attractor? To date, only limited signs of this in
trading of bonds or of foreign exchange.
Part of explanation: reform efforts of Securities and
Exchange Commission, and its almost exclusive
focus on share-trading.
But Island, its history, the local conflict out of which
it emerged, and its matching engine important in
providing the most influential single exemplar of
new way of trading.
Innovation is bricolage (qv
misinterpretations of ‘performativity’)
Machines (Island matching engine) help
shape markets
ANT ‘inversion’: scales aren’t fixed;
micro can become macro and vice
versa; content and context can switch
Path-dependence (in QWERTY sense)?
See also D MacKenzie and J-P Pardo-Guerra, ‘Insurgent
Capitalism’, Economy and Society, forthcoming. Available at:
www.sps.ed.ac.uk/staff/sociology/mackenzie_donald