Tagged: retail investors

The Big Story

Here we go again. 

Twitter fans of Fast Trading are claiming these firms help markets and especially the little guy. Now, before you check out, what’s the Big Market Story of 2021?

Retail trading. Right?  Meme stocks. The rise of the Reddit Mob.

Illustration 209856483 © Hafakot | Dreamstime.com

Editorial Note: And the rise of the #EDGEMob, the success of our trading decision-support platform, Market Structure EDGE, winner of the 2021 Benzinga Global Fintech Award for Best Day Trading Software.  EDGE helps retail traders win by seeing Supply and Demand, the very thing Fast Traders obfuscate daily.

Okay, back to our story.

Fast Trading is computerized speculation.  What most call “market-making.” In the sense that these firms buy stuff wholesale – orders from retail traders – and sell it retail (in the stock market and often back to retail traders via dark pools in bits), that’s true.

But it’s not market-making like Goldman Sachs providing research coverage on hundreds of stocks and committing to buy and sell them.

Fast Traders don’t have customers, don’t write research, don’t most times even commit to both buying and selling. They aim to own nothing at day’s end.  They profit on how prices change. Ironically, they create volatility to vacuum it away through tiny spreads.

Money for nothing.

So, these people on Twitter were saying Citadel and Jane Street and Two Sigma and G1X (unit of Susquehanna that buys retail flow) have better execution-quality than stock-exchange IEX.

That’s like saying sprinters have faster 100-meter times than marathoners.  Well, no kidding. They’re doing different things.  IEX is trying to increase trade-size so we can buy something meaningful. Fast Traders are after the opposite. Tiny spreads, tiny trades.

If you’re getting a headache, let me bring it all around.

“Execution Quality” is part of Reg NMS, the regulatory structure of the stock market. It’s benchmarked by thin gaps between prices, in effect. That is, a spread of a penny is no good. A spread of a tenth of a penny, awesome.

Yet Reg NMS prohibits quoting prices in increments of less than a penny, so there’s an element of irony here.  Quote sub-penny? Illegal. Trade sub-penny? The goal!

At any rate, the SEC determined that it could validate how great the market it had created worked by metering whether brokers executed trades near the best overall prices.

Well, that seems good.

Except the best price is determined by the brokers who are being measured on delivering best prices. That’s like saying, “Whoever you see in the mirror gets to judge you.”

I’m talkin’ ‘bout the man in the mirror. He’s gonna have to change his—sorry, digression. Thank you, Michael Jackson, for that awesome song.

Why use data from firms with no customers – Fast Traders serve none in the sense that Goldman Sachs or IEX do – to determine if there is market quality?

And would someone explain who benefits from a narrow spread?  Anyone? Anyone?

The parties buying and selling stuff but not wanting to own it.  That’s who.

The stock market is supposed to help investors, who want to own stuff.  Yet the rules give kudos to trading firms exploiting retail money, clouding supply and demand, and owning nothing.

That’s how retail money chased herds of buffalo off cliffs in AMC, GME and others. Market regulation crowns highwaymen champions for “narrowing the spread” while meanwhile no one knows what the hell is going on.

Well, we do.  We’re not confused at all.

But what reached a climax in 2021 besides retail trading was confusion. Public companies, do you know why your stock went up or down? Investors and traders, did the market make sense to you?

Stocks fell. Pandemic fears. Stocks zoomed. Fears were easing. Wash, rinse, repeat.

We found it entertaining, as we watched Supply and Demand and saw the market move largely in synchrony with that beat.

Low spreads don’t help public companies or traders. They help regulators justify market structure, market operators make money selling data, Fast Traders make money buying low and selling high in tenths of pennies.

All while saying the market exists for investors and public companies.

Good one, that.

Will it change in 2022?  No.

So, will you?

Traders, if you don’t know Supply and Demand, you’re kidding yourself.

And public companies, I’m not sure what else to say that I haven’t said in 17 years. We can be the people who answer an ever quieter phone, the setters of dwindling meetings as money goes quantitative, data goes quantitative.

Or we can understand Supply and Demand in the stock market.  Ask, and we’ll show you.

Two choices in 2022. Happy New Year! 

Retail Reality

Do retail investors matter?

Depends what you mean. They’re important and valuable as investors. I once headed investor relations for a company with thousands of retail holders. I was president of an IR services firm that focused on retail-targeting strategies.

But when people ask me if retail investors have a chance in the market, my answer is monosyllabic: No. Scottrade, the online brokerage, runs ads featuring clients claiming that “I don’t trade like everyone else. I trade like me.” That seems to suggest retail traders can craft unique schemes that stand apart. While it’s theoretically conceivable for a retail order to price the market under rules requiring “market” orders to meet at the best national offer to sell, in practice it’s remote. Retail orders are passengers on market trains.

I’ll explain. Scottrade says in its order-routing filings that 100% of its trades are non-directed – they don’t specify execution venues. The average Scottrade customer is thus statistically most likely to trade not like you or me or him or her, but like Knight Securities, since that’s where a quarter of Scottrade orders go.

Another chunk from Scottrade lands at Citadel, the high-speed hedge-fund owned platform. Citigroup gets the largest portion but it’s divided between limit orders at Lavaflow, Citi’s fast-trading facility, and market orders at Citigroup’s agency desk (suggesting Citi powers arbitrage).

About 15% of orders shoot through Direct Edge, the high-frequency-trading exchange that’s merging with BATS, another sizzling execution venue. And for options and futures and NYSE stocks, about 7% of Scottrade’s orders route to G1 Securities that until recently was owned by rival E*Trade, which has sold it Susquehanna, a quantitative trader. Yup, folks who hoped to “trade like me” were actually trading like E*Trade. (more…)