A number of the different American stock markets are applying to the Securities and Exchange Commission to be allowed to have different rules and different trading speeds. We should encourage this all we can–for of course there should be a variety of methods by–and venues at–which we can trade stocks. The very point of a stock market itself is that market mechanisms produce the most efficient outcome. That is not restricted just to buying and selling things on markets either, it extends further to the rules and systems by which we buy and sell things.
Just to be recondite about it, say that we think the best way of selling something is by auction. We’re really not very sure of the price so, OK, we say, right here right now, who will give me how much for it? Best price wins the lot. But even then we’ve got two different ways of doing is, by ascending and by descending (or what is called a “Dutch” auction) price. As it happens we generally think that an ascending price auction is the best way to sell something pretty unique, a painting say. We also generally think that a Dutch auction is the best way to sell one lot of something very similar to the next lot–which is why descending price auctions are used in wholesale flower markets.
But at some point in time we had to have tried those the other way around. To find out which worked better. It being the market in the methods of having a market which leads us to the efficient market structure. So it is with this about the various stock markets in the US:
U.S. stock exchanges that spent decades speeding up markets with cutting-edge technology are now rushing to slow them down.
The New York Stock Exchange, Chicago Stock Exchange and Nasdaq Inc are all awaiting decisions by the U.S. Securities and Exchange Commission on whether they can delay trades through so-called “speed bumps” and new order types.
OK, so this is all that fuss about High Frequency Trading, the Michael Lewis book and so on. And really, we only know three things about HFT. One is that it’s a mature technology now, the big profits have already been competed away. The second is that the people who have made out like bandits are the retail customers. The current market set up means that Mom filling up Pop’s 401 (k) gets the best price in the country as a matter of right and pays, compared to even the recent part, peanuts in the trading spread for doing so. The third is that some people have lost bigly as well–that’s the old style equity market makers. A reasonable approximation they’ve all left the business as the margins just aren’t there any more. So, a reasonable story about HFT is the new technology outcompeted the old market insiders to the benefit of retail customers. Hurrah! to that then.
However, this doesn’t mean that we think we’ve got the market structure right, only that it’s better than it was:
The about-face comes after advances in technology made it possible to complete trades almost at the speed of light, prompting concerns by some market participants that sophisticated high-frequency traders were eating the lunch of ordinary investors.
Exchanges have profited from selling specialized services to high-frequency traders, which make up more than half of US trading volume. But now they are looking at ways to attract a wider range of investors, at least to certain of their trading venues, or are making sure they are keeping up with each other.
No, that’s just spiel. We know very well that ordinary investors have been the one true gainers from all of this. This is really an argument among major market participants as to who should be favoured by market structure:
In giving IEX the green light, the SEC said exchanges could pause trades for up to a millisecond, as long as the delays were not unfairly discriminatory or anti-competitive.
The NYSE, which is owned by Intercontinental Exchange Inc, essentially wants to copy IEX’s speed bump, as well as an order type the startup pioneered. NYSE argues that while it previously said the model was bad for the market, some institutional investors prefer it and NYSE should be allowed to offer them the choice.
In contrast, the Chicago Stock Exchange put forward a speed-bump plan that some brokers can bypass if they meet strict requirements to provide quotes for others. In doing so, it hopes to create more liquidity.
Rather than a speed bump, Nasdaq wants to introduce an “extended life” order type. It would apply only to orders generated by regular, mom-and-pop investors, who tend to be less informed and therefore coveted by professional traders. The orders would sit exposed for at least a second and then jump ahead of other investors to get filled.