Yearly Archives: 2023

Halted Auction

The NYSE opening auction failed yesterday.

Prices gyrated and trading halted in swaths of large caps including XOM, WMT, UL, T, VZ, RTX, MCD, PRU, UNP, MO and many more – trillions in market cap.

It was, to quote comedian Jeff Foxworthy, pandelirium. Especially among the market-structure crowd on Twitter.  The wreckage to prices, trades, data…whew.

Proposed new SEC rules would sharply increase the number of auctions at exchanges. These retail auctions will last just 300-400 milliseconds, but it means one venue out of about 50 will have to get it right.

Big risk.

And it’s not retail or stock-pickers I’m thinking about but Passive money. Vanguard says 80% of its $8 trillion in assets are passive. 

It’s a bellwether. Blackrock and State Street aren’t far off that number across their combined $15T under management. Over half of Fidelity’s assets now track models. The big banks like UBS and Morgan Stanley and JP Morgan, another $12T or so, are using target-date and asset-allocation models.

That money moves in vast ranks.  It’s measurable. You can see it daily in your data if you know what to watch, like we do.  Image #1 here is what we see when Passive money in the S&P 500 rushes back to Tech and lifts the market.

Image 1. Image courtesy SP500 pattern data Dec 2-30, 2022.

Here’s the thing. All of it depends on reliable historical quote and trade data. Because it’s executed by algorithms.

The stock market is 98% algorithmic, 100% electronic. The software executing rapid-fire small trades needs clean data to calculate prices and sizes and do its work.

The average S&P 500 stock (all save UL above are in it) trades 45,000 times per day, in 105-share increments, about $730mm of stock daily on average, and price moves 2.5% between high and low daily, and 49% of the volume is short (borrowed).

You can’t have hiccups.

And it’s exceedingly difficult for stock-pickers, who are 10% of daily volume in the S&P 500, to set price.  Most of the time, they’re subsumed in the 75% of volume coming from either Passive Investment – all that model-driven money – or Fast Traders who set prices.

The Designated Market Makers on the NYSE floor are Fast Traders. Most of the prices at the rest of the stock exchanges are set by Fast Traders incentivized to bid or offer at the “top of the book.”

I had a trade yesterday execute yesterday at the NYSE in an RLP, a retail liquidity program. A Fast Trader “crossed the spread” to give me a tenth of a penny more per share, and was paid three cents a hundred shares by the NYSE to do it.

Okay, Quast.  My head is spinning. What’s the point? 

If you’re publicly traded, this is your market.  Should someone at every public company know how it works?  Seems so, since the executive team and the Board are fiduciaries to shareholders.

And equally important, WHAT WE DO for the executive team should reflect the facts. 

Let me give you an example.  And it applies to both investors and public companies.  To the latter first, let’s suppose you’re the CFO at 3M Co.  Before you report earnings, you should expect your investor-relations team to tell you what the money has been doing behind price and volume.

Not what your holders are asking, or what the sellside is saying.  Those are known knowns, as they say about battlefields.

The known unknowns include what all the money is actually doing.  Let’s remedy that. Image #2 shows the 30-day Supply/Demand balance in MMM. Deteriorating Demand, Supply high and nearly 60% of trading volume.

Image 2. Courtesy, 30-Day Supply-Demand view, MMM.

That alone, no matter what the story is, says price will fall. Put VALUE messages where machines read them, in the heading and subheading and CEO quote. 

The last image (#3) does what the CFO asks. It shows what the money has been doing the two weeks before earnings. Summarizing the data, price is down 5%, Passive money is up 11% (so it’s a seller), shorting is up, Active Investment is down, Risk Mgmt bets are up.

Image 3. Courtesy 2-wk comparison, MMM.

But stock-pickers – Active Investment – are not sellers. There’s again a chance to attract VALUE money.  The message should reflect it.  Key words should reinforce it.

Then MMM should measure what happens in the week after results and the week after that. What changes?  Report it to execs, to the Board of Directors.

This is core investor-relations today. Because the stock market is electronic and algorithmic and most of the money isn’t rational.  You can’t fix shareholder-value with fundamentals because it’s not how something like $40 trillion of assets looks at equities.  And it’s not how the stock market works.

And investors? If you see falling Demand and rising Supply ahead of earnings, cut your exposure. You can come back later at a better price.

The market is complex and fragile, and issuers need a better handle on its rules and mechanics. So do traders and investors. Right now, the intermediaries are making all the rules. That’s how Citadel made $16 billion last year.

I’m happy for Citadel!  But the rest of us need a say too, and a fair and level playing field.

The Winners

There was a country hit 30 years ago called Nobody Wins.

Why drag out a 1993 song by Radney Foster?  Well, it popped into my head reading the SEC’s proposed new regulations for the US stock market.

Oh, but somebody wins here.

Photo 126390367 / Sec © Grey82 |

If you missed last week’s first chapter, Origins, read it.  I promised this week to describe who wins in the 1,650 pages of new regulations the SEC thinks the stock market needs.

At Amazon is a book called “How to Play Chess: A Beginner’s Guide to Learning the Chess Game, Pieces, Board, Rules, & Strategies.” It says you’ll master chess. It’s got 498 reviews and gets 4.5 stars. It’s 49 pages.

If you can master chess in 49 pages, you’d think the stock market, which the SEC has opened to 100 million Main Street folks by permitting free trading (no commissions!), must be simple. After all, the SEC wouldn’t just let beginners in. Right?

Regulation National Market System, which regulates the stock market’s quotes, prices data and access (to all three) is 520 pages.  Probably a good idea to know what it says.

After all, the US stock market is home to about $45 trillion of invested assets, over 3,500 public companies, over 2,000 Exchange Traded Funds, hundreds of closed-end funds, scads of preferred and other classes. A combined 10,000 securities.

It’s roughly 70% of total global market-capitalization.  If you’re an investor, this market supports your retirement plans.

But wait, there’s more.

The SEC’s Market Data Infrastructure Plan is 900 pages.  You should probably know what’s in that too. With it, the Clayton SEC regime aimed to end the exchange data monopoly. Exchanges sued and blocked parts of it (not the definitions, though).

The stock market and the exchange business are all about data.

The NYSE is a tiny part of Intercontinental Exchange (NYSE: ICE), which is in the data business.  ICE had $9.2 billion of revenue in 2021, $4.1 billion of income, a 44% margin.

According to ICE’s 2021 10K, 71% of its revenue is data, analytics and network services.  Listings are 13%.

The Nasdaq had 2021 revenue of $3.4 billion after deducting $2.2 billion of rebates paid to traders to set prices, and earned $1.2 billion, a 35% margin.

Here’s the irony. The whole of SEC market regulation is about narrow margins. LOW SPREADS. Remember those two words. 

Nasdaq segment-reporting shows 2021 revenue of $1.1 billion from market data, index-licensing and analytics. 

Do the math. Without that byproduct from operating markets and paying traders to set prices, the Nasdaq made $100 million.

That’s still a lot of money. But it’s a 3% margin, not much different than running a grocery store. Grocery stores are low-margin stock markets matching producers of goods with consumers of them.

The stock market is a grocery store for public companies trying to find investors for their shares.  And this grocery store has margins of 35-44%. 

At whose expense?

The intermediaries using the platform such as Citadel, Virtu (30% margin in 2021), Hudson River Trading, Quantlab, Two Sigma, Infinium, GTS, SIG, Tower Research, IMC, Flow Traders, Optiver, make billions of dollars as middlemen.

Jane Street traded $17 trillion of stock in 2020 and made $8 billion, give or take. It’s got 2,000 employees. Bank of America just reported net income of $7.1 billion. It’s got 220,000 employees.

Anybody seeing a trend? 

The SEC has now proposed 1,650 more pages, bringing the total near 3,000, not counting the thousands more pages of rule-filings emanating from the exchanges every year.

And they’re principally focused on shrinking spreads. A penny is too wide. We need tenths of pennies in quotes now, or the little guy is getting screwed.

We’re told.

By the way, you’ll hear a term over and over and over from regulators and exchanges:  Execution Quality.  It’s supposedly what defines the stock market as “good.”

No, it’s what makes money for intermediaries and ensures what the SEC wants: That somebody keeps posting quotes and trades in this absurdly complicated environment.

When you see the term, know it’s obfuscation.

Let me cut out the intermediating verbiage. The SEC sees that we have a bifurcated market where half the trades, roughly, are occurring off-exchange in dark pools, but the exchanges provide the prices, quotes and small spreads. And the exchanges make scads selling resulting DATA.

The SEC also sees that the data advantage held by the exchanges is unfair, but the exchanges sue when the SEC tries to fix it.  And meanwhile as trading OFF exchange nears 50%, the VALUE of the data the exchanges sell is threatened, and so is the necessary tense alliance between the SEC and exchanges.

So the SEC has, with 1,650 pages, struck a deal. We’ll push more trading and quotes and prices back to you, exchanges, so you get more of the spread. But charge less for trades and ensure that the continuous auction market doesn’t break down.

Execution quality.

The winners are the SEC and the exchanges. 

I can promise you this, investors, traders and public companies, parties for which the stock market exists: Trading in tenths of pennies at stock exchanges is bad.

The smaller the spread, the shorter the investment horizon.

And that’s what these latest 1,650 pages promote. Smaller spreads, tinier trades, more data.  Bigger margins for intermediaries. For the purposes I described.

It’ll be called Execution Quality. It means the middlemen are merchandising you.

And you lose.

Do you care? Does anyone anymore?  You issuers, you are the biggest losers. You’ve lost your audience, your capital-formation mechanism.

And if you let the parties running your market make 40 cents of every dollar, you probably deserve it.


I counted the times “issuer” appears in the SEC’s four new market-structure proposals.   

Investors and traders (and issuers), should you care?

Without issuers, there’s nothing to trade. These rules could push issuers onto the endangered species list.  You can read and comment

Photo 108381110 / Austin © Sean Pavone |

on the proposals here, and you should do both. At minimum, read the fact sheets here.

The word “issuer” never appears beneficially. I’ll explain.

We’re back from Austin TX and marking Karen’s mom’s 80th birthday. Friends and family turned out in droves.  We kids (using the term loosely) served 16 bottles of prosecco, white wine and red wine, plus all the trappings including over 80 Italian cream cupcakes.  The oldsters can party.

In the retirement facility where mom resides is a man named Walter Bradley.  He was a professor for 40 years at Colorado School of Mines, Baylor and Texas A&M. He’s got a PhD in polymer sciences. We talked to him, know who he is.

Turns out, everything is made of chemicals and proteins, inanimate or not.  How these compounds combine is what makes plastics. And humans. 

Walter Bradley is a Christian.  He pioneered a school of scientific thought on the origin of life called Intelligent Design.

Stay with me.  As ever, I’ve got a market-structure lesson. 

Ben Stein made a documentary called “Expelled: No Intelligence Allowed.” Walter Bradley is in it.

Whether you believe in God or don’t, how life happened here is a persistent mystery.  Delve into the science – not the ideologies and philosophies predominating on both sides – and you find convergence of opinion:

Nobody knows for sure.

You’d think the science was settled. There’s evolution with the answers. Ah, but no. Giant, whistling holes. Science can’t obviate God.

Dr. Bradley says the Second Law of Thermodynamics disproves a natural origin to life. The principle, called Entropy (that’s what I’d call my rock band), holds that all things move from a state of order to a state of disorder, like kids’ bedrooms.

Life depends on a precise combination of proteins and chemical reactions, which can only arise from the opposite: Moving from disorder to order. It doesn’t occur in nature.

Nobody in science disputes that, believers and atheists alike.

As Ben Stein’s documentary says, the probability that the right string of proteins combines randomly to foster cellular replication is so monstrously unlikely as to accrue gaggles of zeros.  It’s all the same as impossible.

But it happened.

Which brings us back to the word “issuer.” 

It’s in these SEC documents 24 times by my count.  Just six mean “public companies.”

Three times on page 397 (472 total) of the filing called Disclosure of Order Execution Information – do we need almost 500 pages on that? – we’re told issuers are hurt by “financial frictions.”

Says the SEC: “Financial frictions may have an adverse impact on capital formation. In particular, higher transaction costs may hinder customers’ trading activity that would support efficient adjustment of prices and, as a result, may limit prices’ ability to reflect fundamental values. Less efficient prices may result in some issuers experiencing a cost of capital that is higher than if their prices fully reflected underlying values…”

That’s demonstrably false. Like claiming things naturally move from disorder to order.

Trillions of dollars are raised and deployed in private investments without any stock exchanges or “financial friction.” It proves irrefutably that “fundamental values” do not depend on trading.

But that’s still not the point. 

The market started with issuers. It’s the origin of species, so to speak, for stocks.  There were first, before brokers, which in turn created the exchanges that now compete with them, shares of companies. Without them, there is no stock market.

In a 399-page proposal called The Order Competition Rule, the term “issuers” appears three times in reference to the Securities and Exchange Act’s prohibition on discrimination against issuers and unfair allocation of dues and fees.


There are three big exchange groups: The NYSE, with 19.4% of volume across five platforms, most of that at the NYSE floor, and NYSE Arca, its derivatives market.

There is the Nasdaq, with 16.9% on three (not one) platforms.

There’s CBOE, with 12.6% at four platforms.

Do the math. A majority of trading happens somewhere else. You companies listed at the NYSE and Nasdaq, over 80% of your trading occurs where you’re not listed. At no cost.

What are you paying for, then? You pay exchanges to trade your stock. But they’re not. 

Issuers, your fees are too high. What are you going to do about it? The SEC is violating the law. Will you defend yourselves?

Trading firms like Citadel are getting rich a tenth of a penny at a time, at your expense. Exchanges are financial behemoths. And there are half the number of public companies there were when the Nasdaq started. Half the investor-relations jobs.

And these 1,600 pages of new rules compound the divide.

Origins matter. The SEC has forgotten that the stock market originated with issuers.  And cannot exist without them.  Issuers, are you going to buy the myth, or the science?

Next time, we’ll talk about who benefits from these new rules – somebody does! – and what they mean to investors and traders.

Right and Wrong


They got it right, and they got it wrong.  I’ll explain in a moment.

Karen and I took two weeks off from the Market Structure Map and disappeared into the white wilderness.  Steamboat Springs, CO logged the biggest pre-January snow season in nearly 40 years.  Over 200 inches.

I snapped this photo at 10,500 feet atop Sunshine Peak before pointing my skis downhill.

Sunshine Peak, Steamboat Springs ski resort. Courtesy Tim Quast

But there were days when the snow fell in such volume that we resorted to the fireplace and binge-watching Yellowstone.  We’re behind the rest of you but catching up.

I grew up on a cattle ranch. Not one like that with a chopper.

But the battle for survival was similar. We weren’t shooting people and bending interpretations of right and wrong. But I was on hand in the so-called Sagebrush Rebellion when guns bristled everywhere.

My dad would say what Kevin Costner’s character did. Ranching is a hard way to make a living because everything is arrayed against you. The government, the activists, the diseases, the weather. You can do right all day long and still get it wrong.

WSJ columnist James Mackintosh also wrote about right and wrong. Not like Yellowstone, no. He said (subscription required) Wall Street nailed earnings but missed the bear market.

Sellside estimates were within $1 of actual earnings. But the market didn’t do what those numbers should have delivered. Right, and wrong.

If earnings won’t tell you what stocks will do, what’s the point?

That question is the existential one for the investor-relations profession.  In the TV show Yellowstone, the existential question for the Duttons is how to beat impossible odds.

So, IR people, is the market for us or against us?

What John Dutton learns is you have to have influence.  There’s more and I don’t want to give it away.

But it’s the ONE THING the IR profession has never realized. We go right on doing the same things leading to the same inevitable outcome, which is that story doesn’t set price.

Why not? Because the stock market’s purpose isn’t to help your story manifest in your share-price. 

As in any market, the purpose is found in the principal activity. It’s still true that cattle ranching reflects its principal activity: raising bovines to supply a grocery market (you don’t have to like it but it’s true).

A Christmas tree farm raises Christmas trees.

The stock market sets prices.

We’ll come to it in a future Market Structure Map, but those 1,600 pages of proposed new SEC rules you’ve heard about?  They contain nothing that helps you, issuers, see your story better reflected in your shares.

No, they have everything to do with setting prices.  And who sets prices? 

Stock exchanges. Fast Traders. That’s who the market serves. 

How and why?  They learned the Yellowstone lesson. They have people everywhere. They lobby for influence.  They shape rules to help themselves.

We never have.  As a profession, we can do everything right and get it wrong.

I’ll let you ponder that.

Now, a word on the market in 2023 since this is the first Market Structure Map of the new year. Turns out 2022 was a top-ten worst for returns since 1926, with the S&P 500 down 19%.

There are only four periods since 1926 when stocks have posted back-to-back declines:  1929-32, 1939-41, 1973-74, and 2000-02. The losses for those periods were about 86%, 21%, 40%, and 46%. All those periods were recessionary.

S&P 500 losses of about 37% during the so-called Great Financial Crisis came all in a year, 2008.

It won’t surprise me if we notch the first back-to-back losing years since 2001-02 on a total-return basis. 

Why? Because stocks had a top-ten bad year on no reason save prices.  What if we get a reason this year?  All those other periods, again, were recessionary.

And here’s the trouble for investors. It’s not just that it takes five, ten, years to get back to level.  You never get back to level.  Stocks go down 40%, but prices of everything you buy go up.

Each time we retrench, governments intervene and expand the supply of money. So you lose 25% or 50% of your savings, but prices never fall 25-50%.  They rise even faster. 

I penned this letter to the WSJ on how the Federal Reserve contributes to this trouble.

The only money avoiding these growing chasms is the short-term money.  The parties setting prices don’t lose.

The stock exchanges don’t write research or provide market-making support.  Fast Traders don’t support customers, research, issuers. They trade their own capital.

It’s a new year. We have a fresh new chance to do something. 

We must first understand how the stock market works. We can’t argue for change without first knowing what’s wrong (we do, and you should have us on your side).

Number two, as a profession, we need to get some political leverage. NIRI, that’s your puzzle to solve in 2023. It’s not just the right thing to do.  It may be our Yellowstone moment.