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This section of the flash crash analysis is dedicated to explaining the
process of exchange routing. Exchange routing is the process of order flow from one
exchange to another. For example, a quote is placed on exchange A, exchange A then
processes the quote and sends the data to all the other exchanges. Each exchange is
connected to each other. The are also all connected to the Consolidated Quote
System, CQS. CQS is responsible for sending out Nation Best Bid Offer quotes, NBBO.
The CQS system is the only system that sends out NBBO data to customers. It is also
regulated by Regulation NMS. Below is a video representation of how exchange routing
works. The data used is actual data, but it is slowed down so easily follow the flow.
In the video posted below we represent each exchange as a box(each
exchange has a unique color). The large circles that hit the outer edge
of a box, or exchange, is a quote (colors match the exchange). The lines
connecting each box represents an exchange link. The medium
circles that travel along the lines represent the quote being sent from the
original exchange to all the others. The smallest circle (along the top of a box)
represents the exchange processing the quote. The data inside the
box is the internally calculated NBBO system. Inside each box is a
list of the prices, the reporting exchange, and size. Each exchange keeps track of
the NBBO to insure that trades are executed at the best price.
(Direct links to download the video are provided at the
bottom if the embedded video does not work)
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