One of the penalties of refusing to participate in politics is that you end up being governed by your inferiors.
So, purportedly, said Plato. That’s our sole word on current elections.
Illustration 209532110 / Plato © Naci Yavuz | Dreamstime.com
Now let me tell you how my order to buy 50 shares was internalized by my broker, but my limit order to sell it split into two trades at Instinet, and what that’s got to do with the Federal Reserve and public companies.
Sounds like a whodunnit, right?
Let me explain. I trade stocks because of our trading decision-support platform, Market Structure EDGE. It’s a capstone for my long market-structure career: I know now what should matter to public companies, what should matter to traders, how it ALL works.
Continuing, the Fed today probably outlines plans to “taper.” Realize, the Fed has been buying US mortgages at the same time nobody can build houses because there isn’t any paint, no appliances, you can’t find glass, wood went through the roof (so to speak).
So the Fed inflated the value of real estate. Why? Because it prompts people to spend money. To the government, economic growth is spending. Mix surging balance sheets with gobs of Covid cash, and it’s like taking the paddles and telling everybody, “Clear!” and hitting the economy with high voltage.
The Fed has concluded the heartbeat is back and it’s putting away the paddles. Its balance sheet, though, says tapering is a ways off.
What’s that got to do with my trade? The Fed is intermediating our buying and selling to make it act and look like more.
But it’s not more. And the economy rather than looking like an elite athlete – trimmed, toned, fit – is instead just off the gurney.
Put another way, the economy reflects multiple-expansion, a favorite Wall Street explanation for why stocks go up. It means everybody is paying more for the same thing.
We should have let it get tough, trim, fit. Ah well.
Did you see the Wall Street Journal article (subscription required) this week on payment for order flow in stocks and options? I’m happy market structure is getting more airplay. It will in the end be what gets discussed when everyone asks what happened.
Everything is intermediated. The Fed buys mortgages. Traders by trades.
I bought 50 shares of a tech stock at the market. That is, I entered the order and said, “I’ll take the best price available for 50 shares.”
I know my 50 shares is less than the minimum 100-share bid so it MUST be filled at the best price. I also know the stock I bought trades about $16,000 at a time, and my order for 50 shares is just under that.
I’m stacking the deck in my favor by understanding market structure (I also know the stock has screaming Demand, falling Supply, a combo lifting prices, as in the economy, so I’m adding to my advantage, like a high-speed trader).
I had to confirm repeatedly that I understood I’d NOT entered a “limit” order, a trade with a specified price.
Brokers don’t want us traders using market orders because they can’t sell them. So my own broker sold me shares. That’s internalizing the trade, matching it in-house.
I sold via limit order because I was in a meeting. My broker sold it to somebody like Citadel, which split it into two trades at Island (Instinet, owned by Nomura) and took a penny both times. Then price rose almost a dollar more.
Wholesalers see all the flow, everywhere. They buy limit orders only on high odds of rising prices, making a spread, and buying and selling several times over to make more than the $0.08 they paid for my trade. I know it, and expect it.
But the purpose of the market, public companies – you listening to me? – becomes this intermediation. It’s over half of all volume. You think investors are doing it.
And this is the problem with the Fed. It manipulates the capacity to spend, and the value of assets, and manipulation becomes the purpose of the economy.
Markets cease to be free. Outcomes stop serving as barometers of supply and demand.
Actually, we see supply and demand in stocks (ask us). Too many public companies still don’t want to believe the data and instead go on doing pointless stuff. I don’t get that. Why would we want our executives to be ignorant?
Apply that to the economy (maybe to Plato’s observation). Let’s be honest. Rising debt and rising prices are clanging claxons of folly, like my 50 shares becoming two trades. They’re not harbingers of halcyon days.
Why be public for arbitrage? Why trade to be gamed?
We should face facts both places. The sooner, the better. Elsewise we’re governed by our inferiors.
