At 9:45am eastern time September 20, the Nasdaq declared Self-Help against the Nasdaq BX.
September 20 was a Saturday. Relax. It was a test. We saw a bunch last week. If you want to know about the Nasdaq BX, well, another time. It’s the old Boston stock exchange and a so-called “inverted” market where you’re paid to buy, charged to sell.
Anyway.
Under Regulation National Market System Rule 611, exchanges are required to route “marketable” – within the best national bid or offer – trades to the best displayed price. It’s called the “Trade Through Rule” because you can’t trade through the best price.
When it’s determined that an exchange is experiencing technical issues, other exchanges can declare Self-Help as an exemption from sending trades to a malfunctioning market. Love it or hate it, this is how our stock market works.
The exchanges are gearing up for what at first blush looks like a massive regulatory shift. Regulators are redefining the meaning of a “round lot” of 100 shares.
Well, for about 206 stocks by my count. More on that in a moment. Starting Nov 3, the meaning of “round lot” will be revised to reflect price brackets. For stocks priced under $250, a round lot will remain 100 shares.
For those priced $250-$1,000, a round lot will now be 40 shares; $1,000-$10,000, it’s ten shares. And over $10,000 a round lot is a single share.
It seems like a big deal.
Maybe not. The average price of S&P 500 stocks is $230.22 as of Sep 22. Average trade size is 90 shares. Already stocks that should trade a hundred shares at a time don’t.
There is one stock priced over $10,000. Berkshire Hathaway Class A shares. Should we make rules for one stock? Hm.
Of the 206 under that price, the priciest is NVR at $7,925. The five-day average trade size is 5 shares, 20-day average is four shares. Half the target.
At the bottom of the over-$250 list is TTWO at $251.64 two days ago. Average trade-size: 38 shares.
Well.
You wonder why the SEC would pass rules out of step with what’s occurring. The answer is there’s more to it. Stocks will now also under certain rules quote in half-pennies.
A core tenet of Reg NMS is no sub-penny quotes. Oh, there are rafts of sub-penny TRADES. I routinely see executions to the fourth decimal, fractions of a penny.
But heretofore we have always quoted stocks in the smallest increment of our currency.
Now we won’t. Fascinating to me is how our currency devalues to the point where bending to pick up a penny, or more, isn’t worth it (I admit to passing up a quarter sometime ago), but high-speed traders will take fractions of cents.
What’s it mean for public companies? Probably more volume, more fragmentation. Traders will need more activity to get the same return. We have quietly in recent weeks already crept up to twenty BILLION shares of daily volume. You get a lot of volume when most of the action is arbitrage between related instruments like stocks, ETFs, options, futures.
When there’s a $2 spread between the bid and the offer, you don’t trade every 30 milliseconds. You do when there’s a half-penny spread. If we wanted to stop short-termism, it’s what we’d do.
Let’s bring it around practically to the job of driving shareholder value in today’s market. Public companies are diligently targeting investors, crafting stories, checking perceptions, giving color to the sellside to move models this way and that.
And the stock market is geared to half-pennies.
Does that seem cognitively dissonant to you? I mean, why not make the bid and the offer the same like we did when there were specialists on the NYSE floor? The urge to intermediate would sharply diminish. But no, that’s a locked market. Against the rules.
I cannot overstate how this structure becomes the end unto itself, and how it passes the baton to Passive money tracking averages. Our market is full of Passives and machines because of rules. Plain and simple.
There are things I like about today’s stock market. It’s an efficient trading machine. Model Demand/Supply divergences and trading ideas abound. The Daily Trading Ideas portfolios at our decision-support platform, EDGE, had 21 Momentum stocks, 31 Low Volatility stocks. That’s a lot. We can help people profit on those.
And the EDGE Focus Momentum model portfolio (available to subscribers) hit a 2025 milestone yesterday, up 50% year-to-date in 2025.
But for public companies it’s a Clockwork Orange to sell a story to investors while the markets in which buying and selling occur are selling speed, data and tiny spreads. We are braining our heads against the wall and our Boards and c-suites don’t even know it.
What shall we do? Well, not what we’ve always done, that’s for sure. We are out of step. The issuer constituency holds the cards. Nothing exists without us. There are no stocks to trade, nothing to underpin 4,000 ETFs and a gajillion derivatives. Without us.
So change it up. Suck the machine-readable information out of the market. Change when and what you do and say. Stop playing that game.
You want help? Ask us.
