SNAP broke yesterday. I’ll explain two reasons why.
Yes, the company blew the quarter. Dramatic swings in guidance don’t instill joy.
But the losses occurred before anybody talked about them. SNAP closed Monday at $22.47 and opened Tuesday for trading at $14.49 and closed at $12.79.
It lost 36% when most couldn’t trade it and shed just $1.30 during official market hours.
How is that fair?
Regulations are meant to promote a free, fair and open stock market. I think premarket trading should be prohibited because it’s not a level playing field.
Who’s using it? Big institutions with direct access to brokers who operate the markets running around the clock. Hedge funds could dump shares through a prime broker, which instantly sells via so-called dark pools.
And the hedge funds could buy puts – and leverage them – on a whole basket including the stock they dumped, peers, ETFs, indices. All outside market hours.
Something unfair also happens DURING market hours. I’ll explain with my own experience as a retail trader using our decision-support platform, Market Structure EDGE.
It’s not that my trade was unfair. I understand market structure, including how to use volatility, trade-size, liquidity and stock orders to best effect. I made money on the trade.
But it’s instructive for public companies, traders, investors.
I sold 50 shares of NXST. Small trade, with a reasonable return. I pay a modest commission at Interactive Brokers to observe how trades execute.
Most times I buy and sell 100 or fewer shares, often 95 or 99. The average trade-size in the market is less than 100 shares so I don’t want to be an outlier. And you’re looking for blocks? Forget it. The market is algorithmic.
And I know the rules require a market order, one accepting the best offer to sell, to execute immediately at the best price if it’s 100 or fewer shares.
Stay with me – there’s a vital point.
NXST trades about $7,300 at a time (a little under 50 shares), the reason for my trade-size. And it’s 2.1% volatile daily. Since it was up 2% during the day, I knew it was at the top of the daily statistical probability, good time to sell.
I checked the bid/ask spread – the gap between the best bid to buy and offer to sell. Bid was $176.01, offer was $176.25. A spread of $0.25. That’s big for a liquid stock.
So I used a marketable limit order – I picked a spot between them, aiming to the lower side to improve the chance it filled: $176.05. I was wanting to leave.
The trade sat there for a bit, and then filled. I checked. It split into two pieces, 45 shares at “Island,” which is Instinet, the oldest Electronic Communications Network, now owned by Nomura. I paid a commission of $0.19.
And the other piece, five shares, also executed at Instinet at the same price. And I paid $1.02 in commission. For five shares!
What the hell happened?
This is how the ecosystem works. And this rapid action can smash swaths of shareholder value, foster wild and violent market swings – especially during options-expirations (yesterday was Counterparty Tuesday, when banks square monthly derivatives books, and it was a tug-of-war) – and, sometimes, work masterfully.
It’s market structure.
My broker sent the trade to Instinet, determining by pinging that undisplayed shares there would fill it.
And one or more Fast Traders hit and cancelled to take a piece of it, permitting my broker to charge me two commissions, one on five shares, another on 45 shares.
And now my one trade became ammo for two. The going rate at stock exchanges for a trade that sets the best offer is around $0.25 per hundred shares – the exact spread in NXST.
Yes, that’s right. Exchanges PAY traders to set prices. I traded 50 shares, but since the order split, it could become the best national offer two places simultaneously, generating that high frequency trader about $0.15.
What’s more, my order originated as a retail trade, qualifying for Retail Liquidity Programs at stock exchanges that pay an additional $0.03.
So my intermediary, Interactive Brokers, made $1.21. Some high-frequency trader probably made another $0.18 for breaking the trade up and buying and selling it at the same price two places. Zero risk for an $0.18 return.
Do that 100,000 times, it’s big, risk-free money.
It didn’t cost me much. But suppose it was 500,000 shares or five million? Every trade navigates this maze, public companies and investors, getting picked and pecked.
Not only do costs mount for moving any order of size but the market BECOMES this maze. Its purpose disappears into the machination of pennies. Oftentimes it’s tenths of pennies in liquid stocks.
And you’re telling your story, spending on ESG reports, a total approaching $10 billion for public companies complying with rules to inform investors.
And the market is the mass pursuit of pennies. Yes, there are investors. But everybody endures this withering barrage that inflates on the way up, deflates on the way down.
And it’s wrong that the mechanics of the market devolve its form into the intermediated death of a thousand cuts. Is anyone going to do anything about it?