May 27, 2020

Medium Frequency Trading

Liquidity is driving the stock market.  And I don’t mean the Federal Reserve.

I saw it firsthand in my Interactive Brokers account.  I bought 600 shares of GE at the market.  Limit orders are like turn signals in LA:  For sissies.  The average trade-size in GE is a little over 600 shares, or about $3,700.

Ergo, 600 shares should fill without issue. Well, pfffttth on that.

A hundred shares went to Island – which doesn’t exist anymore but the name lives on at Instinet, owned by Nomura. It’s an Alternative Trading System, a dark pool.

Island, for you market structure geeks (you know who you are!), invented the market as it exists today.  Look up Josh Levine and Jeff Citron (the guy behind phone company Vonage now).  And read Scott Patterson’s “Dark Pools.” 

Back to our saga. Another hundred shares filled at the NYSE’s Retail Liquidity Program, meaning I bought them from a high-frequency trader paid by the NYSE to improve the price a half-penny (price was $6.445).

If you’re suffering from insomnia, read this latest update on NYSE Arca fees. I’ll give you something to keep you awake:  a $50 American Express gift card to the first three people to tell me CORRECTLY what selling retail orders pays at NYSE Arca.

Oh, and this is why online retail brokers sell order flow and why high-speed traders buy it.  Read – or try to – the fee schedule. Think about all that complexity filtering through how algorithms route orders around the marketplace.

And think about how it might set the price for things while the good folks on CNBC are divining economic signals from what stocks do.

The exchanges are going to gush about how great this is for me.  You’re getting a better price, see!

Continuing:  Then a hundred shares executed at the very same price and time at CBOE EDGA, a stock exchange that pays traders about $0.18/100 to buy shares (to “remove,” the exchanges like to say, but adding and removing is selling and buying).  If you sell there, you pay.

Then 200 shares matched at $6.448 at a place simply labeled “DARK,” followed by another hundred in the same place, at the same price.

By breaking up my single order into five pieces (IBKR’s algo did it), the price went up.  GE’s market cap is $60 billion. It trades 130 million shares daily. Revenues are $120 billion. Should 20% of my 600-share order price it?

All these trades occurred at 9:25:52 AM MT.  I know the sequence only because the trades are ranked by succession.

This…process, or whatever you want to call it, is pricing the whole stock market.  It’s the Twister – remember that suggestive board game? – version of liquidity.

Our friends Joe Saluzzi, Sal Arnuk and team at Themis Trading are chuckling. This is daily life for them (read their book!).

But do you understand, readers?  GE’s business prospects didn’t do it.

I bought it because Market Structure Sentiment ticked up, signaling gains.  The vast bulk of trades are driven by the same motivation.  For me, it’s Medium Frequency Trading, or what probability for gains exists over a few days.

For most orders it’s far less, and for ten parties – no doubt some of them the same but there is a broker on each side of every trade – my MFT, my medium-frequency trade, was an HFT, a high-frequency trade.

Our collective acts set prices.  Trading heuristics – what do I get for this action versus that one?  Who will pay me to be ahead or behind this trade?

Exchanges and brokers say it bears little on the weight of the money in the market. Oh, really?  Try trading 600 shares of GE at the market. And why is the NYSE’s fee-schedule update 49 pages long?

Get takeout via DoorDash (a restaurant HFT, we could call them) and the price is in the cart. It’s not dependent on volume of food or whether you’re routing the meal to somebody else.

The restaurant pays for the service (or you pay delivery), but the cost is clear, and fixed. It appears to me traders made nearly three cents intermediating my fragmented order, and were paid an additional $0.51-$0.54 for setting prices.

What difference does it make? Motivation. During the placid, halcyon days of Nov 2019, stock prices still moved 2% up and down every day. In March it was over 12%. Right now it’s 3.3%. Every party to a trade gets paid. Price? Volatility.

Try reading the Nasdaq’s response to what we call Reg Nemesis II. No, seriously. Read it. Make sense?  Why is the market so fricking complicated?  Why are we told it’s good?

It lacks credulity. As do most of the daily links drawn to stock prices and headlines.

But I’ve got good news, public companies and investors. If we understand what’s happening, we can turn it to our advantage and influence it, both. I’ve got more to say on both counts soon. It’s happening.  Stay tuned.

Meanwhile, Market Sentiment bottomed last week but we’ve been moving at dog years in equities, so watch out. Things can change on a dime – especially either side of month-end window-dressing.

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