Because there aren’t enough ways to trade, single-stock futures are back. 

On July 27, the CME launched single-stock futures valued at 100 shares each on 55 stocks. Here are the facts from the CME.

The CME also offers “mini” 10-share futures on 22 of them, including SPCX, opening the door to retail trading.

Why single-stock futures?  You can trade them on margin, you can short them without having to locate shares. You know. All the good stuff about long-term investing. 

Add to it the nearly 700 leveraged and inverse ETFs in the stock market.  Thousands of options series including one-day options driving 60% of volume. Why invest in mere stocks when you can gamble on everything, everywhere, all at once?

It’s a reason IPOs fail. The stock market is no longer purposed around capital-formation. It’s stuffed with more derivatives than ever the mortgage market was.

Which brings me to the Order Protection Rule.

If you didn’t know a rule protected stock orders, you’re not alone. It’s part of the complex web of rules comprising Regulation National Market System.

It requires stocks to trade at the best price. The order is protected only up to a certain number of shares, which used to be 100.  Many was the time when I’d put in marketable trades in 99-share batches so they’d be automated and routed to the best price. 

The problem should have been apparent from the beginning.

Firms with big money and potent machines would automate this process – demolishing block trades and turning the stock market into a cross between Asteroids and The Mazerunner. 

Now the SEC has proposed getting rid of the rule.

The SEC had already changed the definition of order protection by redefining the size of a “round lot.” It’s 100 shares now only if price is $250 or less. Over that and up to $500, it’s 40 shares; $500-$1,000, it’s 20 shares; $1,000-10,000, 10 shares. Over $10,000, a single share (one stock, Warren Buffett’s). 

Are you familiar with Regulation National Grocery Market System?  Of course not. There isn’t one. It would be anticompetitive to force grocery stores to offer groceries only at the same price as all other grocery stores. It would be crazy.

Ah, but that’s how the stock market has worked. I’m not going to detail the ways Reg NMS is insane. But one thing about it? It’s mathematical, and measurable. 

I think we should scrap Reg NMS, not just change some of its rules. The problem is Reg NMS came from Congressional legislation, so you can’t just heave it in the trash. 

So the SEC is undoing it piecemeal. 

The problem with that is I think it’s an effort to accommodate tokenization of stocks and blockchain settlement. 

Look. I think blockchain radically reduces intermediation. I’m for it. Tokens might be better than stocks. 

But.

The regulatory construct of the stock market is at loggerheads with blockchain. We can’t have both blockchain and Reg NMS. Yet we try.

That’s the problem with regulation. A few imperious denizens of the national Capitol craft ground rules. Then technology changes, and the ground rules don’t work so we warp them into an accommodating shape.  

And we get cognitive dissonance. Regulators previously declared that the Order Protection Rule confirmed The Law. Now, they must hold a competing idea simultaneously: That, no, UNDOING Order Protection conforms to the law.

How could both things be true?  You can read our Comment Letter on the proposal here if you want some entertainment. 

Look, I’m being bemusedly obtuse! The rule is bad. Reg NMS is bad. But twisting the existing structure to meet emerging technologies is worse. 

The stock market once offered growing enterprises a way to raise capital from risk-taking investors through an auction system that made investing fungible and accessible. 

That idea created tens of thousands of public companies. Now, all the IPOs including SPCX fail, proving that the problem is not size. The problem is THE MARKET. 

Investing and betting are not the same things. Betting is at odds with the objective of public companies, which is to create shareholder value by creating business value.

It’s also why the DJIA soars and the Nasdaq tanks. And the SPX gyrates. All members of the DJIA belong to the SPX. Most have $100 billion or more of market cap – where single-stock futures are focused.

Smart traders can isolate stocks in the DJIA, which is price-weighted, and run those up, which causes the value of options on cap-weighted SPX trackers like SPY to change, driving profits in buying and selling puts and calls.

It’s arbitrage. The market is crammed full of it and will soon trade round the clock. In every way it’s the opposite of a market that forms capital.

We have a chance to fix it and I hope the SEC scraps Reg NMS rather than the Order Protection Rule. That will take time, and patience. Issuers deserve that. We are always left out, looking in.

The good news is ModernIR can measure it all, public companies, and help you turn that craziness into a PLAN for driving shareholder value.

And investors, don’t decide without first seeing Demand and Supply. Take GLW yesterday.  It was a 1.0 on a 10.0 scale. Avoid.

We can’t avoid the market. We adapt. I would prefer we scrap the crap and get it right.