Tagged: IEX

The Death Star

Last Sunday treated us to a picture-perfect Santa Monica day.

We were there helping investor-relations folks at the NIRI Fundamentals conference understand the stock market.

Of it, you probably won’t say to your CFO, “I bet you have no idea how our stock trades.” But it’s bad news if you’re asked by the CFO and have no answer.

So let’s talk about the Death Star. That’s what the industry bemusedly calls today’s trading environment.  The stock market is not at the corner of Broad and Wall or in the heart of Times Square.  It’s in New Jersey on banks of computers at several massive colocation facilities connected by superfast telecommunications infrastructure.

DeathStar

The Death Star (courtesy IEX, T Rowe Price)

The three big exchange groups today each operate four stock markets on those giant computer arrays. Suppose Nordstrom ran four stores in the mall rather than one. We’d think: “Why don’t they put the stuff in one place so customers can easily find it?”

Good question. We’ll answer it in a moment.

BATS Global Inc. is the largest stock exchange in the US now by market-share with its four platforms. Yet it lists only its own shares and exchange-traded funds. ETF trading is good business.

At two of them, traders are paid to buy shares, and at the other two they’re paid to sell (fees differ). This paying traders to buy or sell is called Maker-Taker/Taker-Maker.  Now, the Chicago Board Options Exchange is buying BATS Global.

The Nasdaq also pays traders one place to sell and pays them another place to buy. The Nasdaq is the largest options-market operator. Now the Nasdaq and the CBOE will both run large options/equities trading complexes with fees and credits that encourage traders to do opposite things in different spots, which is arbitrage.

The NYSE is owned by Intercontinental Exchange, and equity trading and listing are fragments of a global revenue colossus in derivatives helping financial players manage risk. ICE is also a huge technology and data purveyor.

By operating multiple platforms, the exchanges can set the best bid or offer, the market’s singular entry point, more often.  Each market then has unique data to sell to brokers and other exchanges, which in turn are required by rule to prove they’re giving customers the best prices – which means they have to buy the data.

There’s your answer. Exchanges operate multiple markets because they make money by changing the prices of everything and encouraging profits on differences. By promoting the arbitrage that vexes you in the IR chair, they sell data and technology.

The only exchange solely offering equity trading and listing that’s not intertwined with derivatives and influenced by trading incentives to set the bid and ask is the newest, IEX.  For our view on IEX and much more, catch the Chicago NIRI chapter’s webcast Friday.

The starting point for understanding any business is recognizing how it makes money.  The Death Star is an inferior capital-raising mechanism (it could be good again with rule-changes issuers should push).  Today, companies like Uber and Facebook grow giant on private equity and use the public market as an exit strategy.

Microsoft and Intel were like reality TV for stocks, taking everyday investors on the long and exciting process of growing in public for all to see and own. We can quibble over causality for this divergence. Our systems monitor the Death Star. It favors trading.

When you understand the Death Star, you arrive at this sort of answer for the CFO: “Since investors and traders can only trade at the best price, our price is most times set by the fastest machines. The big exchanges pay them to set the price so they have price-setting data to sell. They also encourage customers to engage in arbitrage.

“Occasionally active investors shoulder through the arbitrage.  Waves of asset-allocation flows can dominate.  A lot of the time derivatives lead because everybody is focused on managing risk, and in that process short-term divergences develop, which can be traded for profit. And this is why you need an IR professional more than ever.  Somebody has got to understand the Death Star.”

It’s easier to say, “I’m not sure but our story is central.”  It’s just not true most times.

Every IR gal or guy faces this moment of truth: Do I mail in the pat answer, or do I assail the battlements of convention and learn about the Death Star?

You can change your stars, as the Heath Ledger movie A Knight’s Tale asserts. Consistent metrics resonate with executives. If last week Active money led and Sentiment was Neutral, 5.0/10.0, and short volume was down, driving gains, they’ll want to know how those metrics changed this week. Measure and report.

They’ll look to you for the next episode of Star Wars, so to speak. That beats watching the stock or getting sent by them on wild goose chases for answers.  Embrace the change.

Speaking of change, we plan to launch in coming weeks daily sector reports highlighting key metrics – Sentiment, Key Behavior, Short Volume, etc. – for the eleven big industry classifications so you can see what’s happening in your group and how you compare.

There’s much more, so stay tuned! And don’t fear the Death Star.

The IEX Machete

We humans don’t like change.

We become accustomed to uncomfortable shoes, kinks in the neck each morning, the monotony of sameness. Were we recorded we’d likely be surprised to hear ourselves making excuses for why what we don’t like must continue. The USA’s Declaration of Independence lamented how people are disposed to suffer ills rather than change them.

The rise of IEX, the Investors Exchange, embodies that ethos. Late last Friday the enterprising folks canonized by Michael Lewis in his book Flash Boys won longsuffering reward when the Securities and Exchange Commission granted the alternative trading system status as a US stock exchange able to host listings.

We’ve become disposed to suffer ills. It’s been 45 years since companies wanting to list shares publicly with a US national stock market had more than two choices (OTC Markets Group and NYSE MKT, I’m not slighting either of you here). That’s remarkable in a country that prides itself on entrepreneurialism and innovation, and testament to both the byzantine form the market has taken and the entrenched nature of the competition.

Comments on IEX’s exchange application are supportive save for vitriol from would-be peers reminiscent of the invective and condescension of some activist investors (think Icahn and Ackman).

Contrast with the behavior of golfing professionals at last weekend’s US Open. Dustin Johnson won his first major despite a controversial penalty, and his fellow competitors rallied behind him despite what we could call “losing market-share.”  Contender Bubba Watson on CNBC’s Squawk Box said he was with fans shouting “Dus-tin! Dus-tin!”

That’s mature professionalism. By contrast, IEX joins the green jackets of the stock-exchange business to derogations from peers. They’ve lobbied for every penalty stroke.

We mean no offense to the incumbents. But it’s embarrassing. Our stock market obsessed with speed and crammed with arbitrage and mostly inhospitable to the active “long-only” (few now are purely long) investors companies spend all their time and resources courting is meaningfully a product of legacy exchanges. We’ve been sold a bill of goods.

The Duopoly is loath to admit IEX or share the power they’ve exercised over the listing process. Why? If innovation and choice are byproducts of free markets, incumbent opposition should raise eyebrows (kudos to the SEC for reinforcing the mechanism of a free and open market that exists for issuers and investors). They’ve chosen easy regulatory monopoly instead, and it’s made them arrogant.

Without restraint through competition and transparency, the market has become a tangle of vines smothering differentiation between companies and promoting arbitrage over investment. The proof is in plunging ranks of public companies, confusion everywhere about what’s setting prices (we’ve cured that malady by the way), and a general migration of stock-prices toward means without regard to fundamentals (those who blame regulation I get it, but the market itself is the problem).

We’ve lost sight of original purpose. So welcome to the jungle, IEX.  We could use a sharp machete.

Busily Productive

“We try not to confuse busy with productive.”

Thus spake the head of investor-relations for an Israeli tech company years ago, and as we wrap the 2016 NIRI National Conference here in June-gloomy but ever awesome San Diego, I recall it anew.

IR for those of you who don’t know is the job that sits at the confluence of the inflow of capital to companies with shares trading publicly and the outflow of information to the buyers and sellers of shares. With investing gaining popularity in the 1960s, companies organized the effort of courting the former and formalizing the latter, and IR was born.

Attracting investors and communicating effectively will remain a bedrock of our profession until the second-to-last public company is consumed by the one giant firm owning everything and in turn owned by one exchange-traded fund leviathan (let’s hope that future never arrives!).

Most IR spending goes to telling the story and targeting investors, the historical yin and yang of IR.  But how are your shares priced?  Do you know?  Is our profession confusing busy with productive?

Let’s review. IR targets investors suited to the story.  We track corporate peers to find areas needing improvement and ways in which we outperform.  I did this too as a telecom IRO (investor relations officer). Your investment thesis defines unique exceptionalism.

Yet trades are measured by averages, indexes and ETFs hew to the mean, and high-speed traders setting prices want to own nothing.  While you’re trying to rise above, all the algorithms are bending your price back to the middle. It’s one reason why indexes beats stock-pickers: Market structure punishes outliers while active money seeks them.

The only NIRI session I was able to attend this year (we’re busying seeing customers, colleagues and friends during the conference) was a tense paneled polemic (moderated adroitly by one of our profession’s scions, Prudential’s Theresa Molloy) with IEX, hero of Flash Boys with a June 17 SEC deadline on its exchange application, and incumbents the NYSE and the Nasdaq.

Without offense to our market-structure friends at the exchanges, it’s stunning how the legacy firms lobby to preserve speed. Here’s what I mean. When the NYSE and the Nasdaq savage IEX for suggesting that slowing prices down by 350 microseconds is unfair, they are bleating a truth: Their dominance depends on privileges for fast traders.

I’ll reiterate how the market works:  Exchanges don’t aggregate supply and demand, they fracture buying and selling by running multiple markets rather than one. Suppose Nordstrom at the mall split into three stores located at either end and in the middle, with different products in each.  It would inconvenience shoppers, who would have to buy clothes one place and then troop to the far end for shoes. But if Nordstrom was selling data on customer patterns in the mall, it would be a great strategy.

Exchanges pay fast traders to set prices.  Prices are data.  Exchanges make billions selling data.  When IEX says it won’t influence the movement of money by paying for prices but instead will match buyers and sellers fairly and charge them both the same price – which none of the other exchanges do – the truth should be obvious to everyone.

It’s this:  Exchanges are deliberately spreading buyers and sellers apart to sell data. Fast traders are paid by exchanges to create great clouds of tiny trades reflecting narrowly separated prices – the exact opposite of the efficiency of size.

Exchanges sell that price data back to brokers, which are required to give best prices to customers, which they can only demonstrate by buying price data and making sure they match trades at averages of these prices, which means the prices are going to be average, which means the entire market is defined by fast traders and averages.  No wonder Blackrock is enormous. The structure serves it better than stock-pickers – IR’s audience.

This is a racket.  You IR folks are running your executives around the globe at great cost telling the story, targeting investors, tracking ownership-change. Yet the market is built on artificial prices intended to generate data revenue. Structure trumps story.

Stop confusing busy with productive.  Again, telling the story will never go away. But learn what sets your price.

We’ve solved that problem for you.  We announced our Market Structure Analytics Best Practices Guide last Friday, and our new Tableau-powered Market Structure Report.  Five Best Practices. Six Key Metrics. Do these and you’ll be a better IR practitioner in the 21st century – and maybe we’ll cease to be gamed when CEOs understand the market. Five Best Practices (drop me a note for our Guide):

Knowledge. Make it your mission to know how the stock market works.

Measurement.  Measure the market according to how it works, not using some metric created in the 1980s. We have six metrics. That’s all you need to know what matters.

Communication.  Proactively inform your management team about how the six metrics change over time so they stop believing things about the market that aren’t true.

A Good Offense.  Use metrics to drive relationships on the buyside. More meetings confuses busy with productive; develop a better follow-up plan.

A Good Defense.  Since markets don’t work anymore, Activism – a disruption of market structure – is perhaps the most popular active value thesis now.  Activists have had 35 years to learn how to hide from Surveillance.  They don’t know how starkly Market Structure Analytics capture their movements.

Let’s stop being pawns. Without public companies the market does not exist. That’s serious leverage.  Maybe it’s time to starting using it.

Split Millisecond

You’ve heard the phrase split-second decision?

For high-speed traders that would be akin to the plod of a government bureaucracy or the slow creep of a geological era.

Half a second (splitting it) is 500 milliseconds. One millisecond equals a thousand microseconds. One microsecond is a thousand nanoseconds, and a microsecond is to one full second in ratio about what one second is to 11.6 days.  Fortunately we’re not yet into zeptoseconds and yoctoseconds.

IEX, the upstart protagonist in Michael Lewis’s wildly popular Flash Boys, has now filed to become a listing exchange with the NYSE and the Nasdaq.  Smart folks, they looked at the screaming pace of the stock market and rather than targeting the yoctosecond (one trillionth of a trillionth of a second), said: “What if we slowed this chaos down?”

It was a winning idea, and IEX soared up the ranks of trading platforms.  Oh, but ye hath seen no fire and brimstone like that now breathed from high-speed traders and legacy exchanges.  You’d have thought IEX was proposing immolating them all on a pyre.

Which brings us back to one millisecond.  IEX devised a speed bump of 350 microseconds – less than half a millisecond – to slow access to its market so fast traders could not race ahead and execute or cancel trades at other markets where prices may be microseconds different than IEX’s.

Speed matters because Regulation National Market System (Reg NMS) which ten years ago fostered the current stock market of interconnected data nodes and blazing speed said all orders to buy or sell that are seeking to fill must be automated and immediate.

Of course, nobody defined “immediate.”  Using only common sense you can understand what unfolded.  If the “stock market” isn’t a single destination but many bound together by the laws of physics and technology, some humans are going to go, “What if we used computers to buy low over there and sell high over here really fast?”

Now add this fact to the mix. Reg NMS divided common data revenues according to how often an exchange has the best available price. And rules require brokers to buy other data from the exchanges to ensure that they know the best prices.  Plus, Reg NMS capped what exchanges could charge for trades at $0.30 per hundred shares.

Left to chance, how could an exchange know if it would earn data revenues or develop valuable data to sell? Well, the law didn’t prohibit incentives.

Voila! Exchanges came up with the same idea retailers have been using for no doubt thousands of years going back to cuneiform:  Offer a coupon.  Exchanges started paying traders to set the best price in the market.  The more often you could do that, the more the exchange would pay.

Now those “rebates” are routinely more than the capped fee of $0.30 per hundred shares, and now arguably most prices are set by proprietary (having no customers) traders whose technology platforms trade thousands of securities over multiple asset classes simultaneously in fractions of seconds to profit from tiny arbitrage spreads and rebates.  Symbiosis between high-speed firms and exchanges helps the latter generate billions of dollars of revenue from data and technology services around this model.

Enter the SEC in March this year.  The Commission said in effect, “We think one millisecond is immediate.” Implication: IEX’s architecture is fine.

But it’s more than that. Legacy exchanges and high-speed traders reacted with horror and outrage. Billions of dollars have been spent devising systems that maximize speed, prices and data revenues.  The market now depends for best prices on a system of incentives and arbitrage trades clustered around the capacity to do things in LESS than a millisecond. The evidence overwhelms that structure favors speed.

Is a millisecond vital to capital formation? I’ve been running this business for eleven years and it’s taken enormous effort and dedication to build value. I would never let arbitragers with no ownership interest price in fractions of seconds these accumulated years of time and investment.

So why are you, public companies? Food for thought. Now if a millisecond is immediate, we may slam into the reality of our dependence on arbitrage.  But really?  A millisecond?

Reflection

Most of you are out this week, but you’ve got phones.

Unless you’re disconnected from them like we were (by choice) a couple weeks back in the Caribbean, you’ll see this post. Send it to your CEO and CFO.

Whatever the theme for the year – “it ended flat,” “The Fed led,” “August Correction,” “Flash Boys,” “The Year of the ETF” – we’ll wrap it by pointing you to our friends at Themis Trading for a final lesson on market structure.  Read “Yale Investment Chief: America’s Equity Markets are Broken,” (if you’re not reading the Themis blog you should be) and reflect:

-The $25 billion Yale endowment fund favors private investments where horizons are longer and less liquid. Think about how often you’ve heard you need “more liquidity.”

-“Market fragmentation allows high-frequency traders and exchanges to profit at the expense of long-term investors.”

-“Market depth is an illusion that fades in the face of real buying and selling.”

-“Exchanges advance the interests of traders by sponsoring esoteric order types, which for hard-to-understand reasons receive the approval of the SEC.”

-And if you’ve not yet done so, read Flash Boys

Then read this editorial in the New York Times.

On January 6, we’ll talk about 2016.  Happy New Year!

The Frontier

A war of words is unfolding in our profession.

In case you’ve not followed, it’s about the market for the product you manage as investor-relations officers. Many of you have read Flash Boys, Michael Lewis’s (The Big Short is soon coming to movie screens) engaging story of high-speed trading in equities. IEX, the upstart Lewis profiles, aims now to become a stock exchange, listing and trading your shares. Its application is up for public comment.

The dirt’s flying. IEX is accused by establishment exchanges of operating an unfair structure. The broker earned its stripes by offering investors a transparent alternative trading system characterized by the Magic Shoe Box – a fiber optic coil standardizing access to prices. You ought to read what’s been said and how IEX is responding.  We suspect its future fellows may regret having hurled recriminations. Seriously. See the comment letters from foes and friends (Southeastern Management’s supportive letter, signed by fellow investment managers in Declaration of Independence fashion, is a must-read. We’re finalizing ours now.).

Why care from the IR chair? Can your CFO explain to the Board how the company’s shares trade?  Public companies have left responsibility for the market to somebody else. The small city of Bell, CA followed this strategy and later found its managers were paying themselves a million dollars. Do you know what your exchange sells?

We’re picking no fights with the Big Two though you regular readers know we’re critical of their arbitrage incentives, how exchange revenue-drivers shift focus from investment to setting prices. When they match a baseline percentage of trades in your shares (and quote best prices often enough), then under the rules of the Consolidated Tape Association, exchanges receive the lion’s share of market-data revenues from the national system tracking prices and volumes. I think the establishment simply resists sharing with IEX a piece of this pie (how about growing the pie bigger?).

By setting prices continuously the exchanges create additional proprietary data that they sell back to traders and market centers. Why do they buy it?  Any participant serving customers must offer best prices and to ensure that they do, rules say they must buy all the data. Fee schedules for the exchanges show data-feeds can cost vast sums.

Yet in a perverse irony that cannot be blamed solely on the exchanges, traders with no customers often set most prices. These firms are the high-frequency traders about which Flash Boys unfolds its racy narrative.

IEX won’t be paying fast traders to set prices. It’s got a straightforward approach to matching customers. Read the comments on both sides and send a couple along to your executives. Ultimately the equity market exists for you, public companies, and your active investors, not so traders can arbitrage some split-second spread. We should then ask why legacy exchanges are paying for split-second prices.

We admire our friends at IEX and want them to succeed. Where companies once listed on many exchanges – Pacific, Boston, Philadelphia, Chicago, Cincinnati and other markets – the choices today are Either Or.  BATS has no current plans for listings beyond ETFs so it’s a duopoly. Our profession should welcome a fresh third option.

As the tryptophan turkey high tomorrow washes by and you give thanks (in the USA we worship turkey on the 4th Thursday of November, international readers), be glad about the ever-present opportunity for say on market structure, about which issuers are notoriously silent. Resolve to be louder.  Go forth boldly and lay claim to the frontier.

Crumbling Quotes

Terra firma. In Latin, “solid earth.”

Two thousand years ago people thought Latin would be the lasting language of commerce. History disproved that thesis, but the notion of a firm foundation remains. In stock-trading, however, the ground relentlessly crumbles as prices shift in illusion.

The significance of this condition goes beyond whether investors are getting fair prices. Iconoclastic IEX, the alternative trading system and prospective exchange introduced popularly in Michael Lewis’s book Flash Boys, has a solution. More on that in a moment.

Many don’t think there’s a problem. Costs are low, we’re told. Apparently stocks trade easily. But the success measures themselves are incorrect. Clear supply and demand, identifiable participants, differentiated price, service and products – these are hallmarks of free-market function. The buyers and sellers who benefit from low spreads are those whose minds are always changing.

The stock market today forces competitors to share products and to match each other’s prices. Most observable prices come from parties aiming to own nothing by day’s end. Quotes reflect seismographic instability. Nobody knows real supply or demand because 42% of traded shares are borrowed and by our measures 85% of market activity is routinely motivated by something besides rational thought. Half the volume flows through intermediaries who take great pains to remain anonymous. Imagine walking into a shopping mall full of storefronts without signs. You’d feel like you were frequenting something illegal, chthonian.

The eleven registered exchanges and 40 alternative systems comprising the National Market System are in competition with each other no differently than Nordstrom and Saks, but no law requires Nordstrom to point customers down the concourse because a marquee posting best prices says it must. In free markets, humans compete on merit. If you want a good deal cut out the middle man. (more…)

First Things First

If you’re in a tree sawing off a branch, note which side of it you’re standing on.

The guy studying the branch was Brad Katsuyama, CEO at dark pool IEX, which has designs on exchange-hood. He was speaking along with others before that folksy and fashionable Washington DC club, the Senate Permanent Subcommittee on Investigations (you get a titular sense our republic is engaged in perpetual sleuthing – and how do you conclude a hunt when its sponsor is permanent?).

Katsuyama, who called markets “rigged” in Michael Lewis’s Flash Boys, said yesterday, “IEX was created within the current regulatory framework.”

Translation: “We invested big bucks finding a solution that helps investors and complies with rules and we won’t cut off our noses to spite high-speed faces.”

Wait a minute. Doesn’t IEX hate the current framework? For those who’ve not read Flash Boys yet, I won’t spoil it. Ronan Ryan, who earns his own “problem” chapter, entertained a big NIRI National breakout session last week. Karen (beloved spouse and ModernIR COO) thought it was the best one ever at NIRI. Even with the f-bombs.

I’m not knocking IEX! Love ‘em. But a point has been missed. In order to facilitate what should naturally occur – buyers finding sellers – IEX had to perform unnatural acts. Let me rephrase. There are rules governing stock orders. To comply, IEX created the Magic Shoe Box, a 38-mile fiberoptic hampster wheel to neutralize fast-trading’s version of location, location, location.

Why is some crazy Rube Goldberg contraption necessary to structure a market so it appeals to real investors? Today’s equity market defies Occam’s Razor, which at risk of offending you experts on philosophy I’ll dumb down to “simplest is best.” For proof, the outfit heralded with restoring fairness must perform technological gymnastics to achieve it.

Having committed effort to solving a problem that only exists through synthetic warping-by-market-rule, IEX now is in a quandary. It can’t call for an end to something for which it just found a solution.

We here at ModernIR have long decried how arbitrage prices stocks. The role of the consolidated tape in prices, how data revenues are shared among market centers, and what makes data and circuits at exchanges valuable cements that reality. This foundation now underpins the US stock market with its ETFs, its 44% short volume daily, and its tens of trillions of dollars annually.

It may be an SOB. But to paraphrase political leaders of past generations describing distasteful foreign dictators who were allies: it’s our SOB.

The Senate hearing spotlighted “maker-taker,” about which we’ve written much and often. It describes incentives paid to traders to bring their orders to markets. The NYSE is on the record calling for its end.

We remain uncertain if the new owners of the NYSE understand how the market works. Remove incentives at the NYSE, and why would anyone do business there? It’s a marketplace lacking any native orders. It imports 100% of its goods, with rebates.

“Quast has gone round the bend,” you say. “He’s for HFT.”

Not at all! But first things first. Before we outlaw maker-taker (happy to explain what this means – just send me a note), we had better disconnect markets from each other, and remove the requirement that trades match between the best bid and offer. If we don’t, we will have a stunning disaster. Public companies should care about that.

And if the SEC is unprepared to loosen its grip so the market may function as a free one should, where buyers and sellers match at prices within the natural limits of supply and demand, then we best get used to the SOB we’ve got.

Either way, IROs, do you measure markets the way they work now? Monitor behavioral market-shares, short-volume and dynamic fair value. If you’re tracking ownership and moving averages, you’re missing most of what’s actually occurring.

Flash Boys

I don’t skateboard. But the title of Michael Lewis’s new book on high-speed trading, Flash Boys, made me think Lewis could’ve called it DC-town & Flash Boys.

Legendary skateboarder Stacy Peralta directed the 2001 documentary Dogtown & Z-boys chronicling the meteoric rise of a craze involving slapping wheels on little boards and engaging in aerobatic feats using public infrastructure such as steps and handrails. From Dogtown, slang for south Santa Monica near Venice Beach, Peralta’s Sean-Penn-narrated film tracked the groundbreaking (and wrist-breaking) 1978 exploits of the Zephyr skateboarding team, thus the “Z-boys.”

Skateboarding has got nothing to do with trading, save that both are frantic activities with dubious social benefit. We’ve been declaiming on these pages for more than a half-decade how fast intermediaries are stock-market cholesterol. So, more attention is great if the examiner’s light shines in the right place.

If you missed it, literary gadfly Lewis, whose works as the Oscar Wilde of nonfictional exposé include Moneyball (loved the movie), Blindside, Liar’s Poker and the Big Short, last week told 60 Minutes the US stock market is rigged.

The high-frequency trading crowd was caught flat-footed. But yesterday Brad Katsuyama from IEX, a dark pool for long investors that rose out of RBC, dusted it up on CNBC with Bill O’Brien from BATS/Direct Edge, an exchange catering to fast orders.

Which brings us to why Lewis might’ve called his book DC-town & Flash Boys. The exploitation of speedy small orders goes back to 1988. In the wake of the 1987 crash, volumes dropped because people feared markets. The NASD (FINRA today) created the Small Order Execution System (SOES – pronounced “soze”) both to give small investors a chance to trade 100 shares electronically, and to stimulate volume. Banditry blossomed. Professionals with computers began trading in wee increments. Volume returned. The little guy? Hm.

Regulators have always wanted to give the little guy opportunity to execute orders like the big guys. It’s admirable. It’s also impossible. Purchasing power is king. Attempt to make $1 and $1,000 equal in how trades execute, and what will happen is the big guys will shift to doing things $1 at a time. The little guy will still lose out but now your market is mayhem confusing busy with productive.

These benighted gaffes seem eerily to originate in Washington DC. Michael Lewis says big banks, high-speed traders and exchanges have rigged markets. We agree these three set prices for everybody. But they’re following the rules. (more…)