April 28, 2021

Message vs Messages

It’s earnings season. Across the market, companies beat expectations and lift guidance and stocks decline. 

Huh?

I can offer a broad array of cases.  Take TSLA.  Massive quarter, monstrous boost to forward views.  Stock declines.

And yes, I Tweeted before TSLA reported that its price would probably fall.

A Consumer Staples stock beat all the key metrics, lifted guidance. Stock fell 10%, another 10% in following days.

There’s a figure that explains what’s happening: 350 billion. 

That’s the number of order messages processed on a single March day this year by the NYSE, according to head of equities Hope Jarkowski in a TABB Forum interview.  It was a new highwater mark for the exchange, where the previous record in March 2020 was 330 billion.

What’s that got to do with reporting great numbers and seeing your stock swoon? Public companies and investors both deserve to know, and the answer is there in the mass pandemonium of message traffic.

When billions of messages for stock orders are flying around, that’s not rational behavior. That’s money moving near the speed of light.  That’s speculation.

The market is crammed with it.

And what are we doing, public companies (investors, I’ll come to you in a bit)?  We’re prepping our numbers and expecting the stock to reflect what those say, good or bad.

Too many of us are still leading our boards and executive teams to think the numbers drive the stock, even though it’s 2021 and we’ve had this high-speed chaff-winnowing market since 2007 when Regulation National Market System was implemented.

It’s part of the investor-relations job to know the ORDER MESSAGES, not the message, drive the stock. About 350 billion of them on high-traffic days at just the NYSE Group of five stock exchanges and two options markets.

And why does the NYSE operate seven stock and options markets if an exchange is supposed to AGGREGATE buy and sell interest?

Because they’re NOT aggregating buy and sell interest. They want message traffic, a lot of orders.  This is why you need firms like ModernIR, a check and balance on the exchanges, which don’t tell you what the money is doing.

The image here comes courtesy of IEX, the Investors Exchange, and shows how bursts of trades – which flow through messaging traffic – come from proprietary trading firms within two milliseconds of changes in price.

For comparison, hummingbirds flap their wings about 80 times per second, equivalent to about once every 12 milliseconds.  So in a fraction of the flap of hummingbird wings, your entire market structure could shift from positive to negative.  Rational? Nope.

Case in point.  I bought 200 shares of NCLH at the market and it executed at the NYSE RLP.

What’s that?  My broker, Interactive Brokers, is a Retail Member Organization.  It can execute the trade for a tenth of a penny higher than the offer at the NYSE’s Retail Liquidity Program, where a high-speed trader can earn three cents per hundred shares for filling my order.

And if the seller is a NYSE Designated Market Maker (see page 20 here), it’s 20 cents per hundred, 40 cents to sell me 200 shares at one-tenth of a penny better than the best displayed price.

Got that? Sure, I got $30.169 instead of $30.17.  Oh boy. But talk about convoluted.  Why the hell would an exchange do that?

For 350 billion reasons.  Traffic is data. The RLP and my broker set the best bid and offer. That’s money – literally.  Data is money. Best prices are data. We’ve all been buffaloed into believing a tenth of a penny matters. No it doesn’t. We’re being gamed, merchandised.

The more platforms, the more prices, the more data – and especially if five are stocks and two are options on those stocks.    

That’s why your shares implode on results.  Suppose a million of those messages are a bunch of parties shorting, and the market tips the other way in tenths of pennies on hummingbird beats?  In the case of the Staples stock above, over 72% of volume that day was short – borrowed. Not story. Just data. Bets exchanges fill.

So the whole food chain of order-flow messages and order types to take advantage of a retail trade or pay a high-speed trader to be the best bid or offer can cook the market.

Now, why is that all right with you, public companies?

Part of the answer is not knowing enough about the stock market.  We can help.

Investors, this is your market too. I looked at TSLA Market Structure Sentiment. Peaked and falling. Probability is the stock declines. Doesn’t matter what Elon Musk says.

You’re better to trade using Market Structure Sentiment. Stocks can’t be relied upon to behave rationally.  They DO follow supply and demand.

Other than that, everything’s fine.

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