04/25/2005

If you want to get creative, you could make a peer-to-peer negotiation
system where limit orders get kept on the traders' individual machines
rather then being sent into your server. Each time someone enters a new
order, it sort of makes the rounds and gets sent to all the other traders'
machines looking for a match - kinda like a big, specialized  instant
messenger system. You'd have to be very carefull to make sure that at
every step the message is treated as a message rather than an order to 
avoid triggering ATS. If you wanted to be *really* cool, you'd actually 
build it on top of an existing instant messengering system like AOL or 
YAHOO so that no one could ever alledge that it was an ATS - it would 
just be a very fancy IM client.

Very straight forward. First you make a little text-based protocol with 
messages like...

"OFFER #71723 - I WANT TO SELL 1000 IBM 41 TIMEOUT 45"
"ACCEPT #2342- I WANT TO BUY 1000 IBM 41"
"ACCEPTED #44354- DONE - I WILL FORWARD TO BROKER FOR CONSUMATION"
"TRADE REQUEST #44354 - I SELL 1000 IBM 41 TO BIGJOSH"
"TRADE REQUEST #44354 - I  BUY 1000 IBM 41 FROM BIGJOE"
"TRADE CONFIRMED #44354 - YOU SOLD 1000 IBM 41 TO BIGJOSH"
"TRADE CONFIRMED #44354 - YOU  BOT 1000 IBM 41 FROM BIGJOE"

...then make a very simple IM front end that makes it easy for people to 
generate and view these messages. It would have something that looked like
an order entry screen that would send out the "OFFER" messages. You would 
definately not call it an order entry screen. It would also listen for all
the incoming "OFFER" messages and keep them in a database so you could 
display something that looked like a quote for a given stock. You would 
definately not call it a quote. You would make it so that clicking on one
of the displayed "OFFER" messages would automatically send an "ACCEPT"
message back to the person who sent the "OFFER".

Finally, you'd have to make the very simple IM client on your end that
would listen for pairs of incoming "TRADE REQUEST" messages, create a trade
report and ticket, and then send back "TRADE CONFIRMED" messages to the 
participants.

You have to handle some edge cases. When more then one person responds to
an  "OFFER", you need to generate a "TOO LATE" message to the loosers. Same 
if the offer is withdrawn. You'd also have to handle cases where you only get
one "TRADE REQUEST" message.

Finally, you'd have to put a lot of thought into your policies. You'd 
probably want to change usernames very frequently so that people get 
anonymitity.You'd want to keep track of people who put in "OFFER"s and
then prematurely cancel them in hopes of seeing how many "ACCEPT"s come in. Not
hard stuff, but stuff that you have to get right or people will game the 
system.

You could use PGP hashes to sign the messages and ignore messages that fail the 
signature check. This prevents fake people from crashing the party, and prevents
real people from saying "that wasn't my message!" when things don't go thier way.

You could even have clearing firms double sign orders showing that they will
stand behind the trade. Now you don't even have to trust your counter party,
the trade is not done until it is effectively also (almost instantly) cleared.

Should be very easy to write since you don't have to do any of the
messaging yourself. No networks to build either. Use any or all of the 
existing systems. If you can send a text message over it, you can trade over it. 
You could even postpone writing the part that lives at your office and just do it 
by hand in the begining.

You should publish the text protocol so that other people can build custom
software to enter and display messages.You should charge nothing for 
participating in the system and using the software. You should make your 
charge for doing the reporting and clearing be *very* low. You should be 
very receptive to people who don't want to use you as thier broker and
offer them an easy pass-though mechanism. If you do these things, and the
software works well, and you get critical mass, and you make sure it can't be
gamed, you will quickly own the world.

So, you are going to build it? Send me a link next week when it is done so
I 
can try it out!

-josh