The SEC is finally waking up to the fact that with all of their attempts to “level the playing field” in equities between the retail investor and the industry professional with their adjustments to market structure - they have actually decimated it. If you jockey stocks for a living and want to get your blood boiling then check out the following link highlighting SEC Chairman Mary Shapiro's recent presentation to the Economic Club of New York (sounds like a really fun group).
Mary tries to casually pass off, as if it just sort of happened, that the NYSE only executes 26% of the volume in their names, and that the rest of the trading is split (I’d argue splintered) among 10 public exchanges, more than 30 dark pools, and over 200 broker dealers. In other words – traders fly blind now. Viable counter-parties have their backs to each other in a dark room and they are blindfolded and gagged. It is no wonder they can't find each other.
Mary casually pointed out that 30% of the volume in US equities is executed in a black hole, I mean, “venues that do not display their liquidity or make it generally available to the public” as she more eloquently put it. How are you supposed to find liquidity, know if there is liquidity, or keep track of what's actually transacting?
Permitting this lack of market transparency is exactly what has enabled all of the splintering. Investment banks had a massive role in doing away with both open outcry on the Mercantile Exchange and the specialist system on the NYSE so that they could bring more execution profit upstairs under the guise of “market efficiency.” Now that they’ve done that, we’re all left trying to navigate a market dominated by high frequency traders (HFT’s), quote stuffers, layerers, and undisguised market manipulators. Every quote in a supposedly liquid stock is represented by BATS, ARCA, NSDQ, NYSE, EDGX, CINN, FLOW, NQBX, and CBSX and it’s all a mirage when you try to trade.
Quotes that HFT’s stuff with orders are meant to look like liquidity but they’re actually set up to make you think that there are more buyers or sellers than there really are. They are a con, just like Henry Gondorff and Johnny Hooker in The Sting. They are also the reason that stocks now trade 100 shares at a time and most participants are more than happy to trade when the other guy trades, even if it’s at a slightly worse price. We have been transformed from bold staple eating traders into sheep.
Look at Walgreen on Tuesday, September 28th. WAG traded 31.7 million shares as it rallied 14% on earnings. The biggest print, outside of the 356,192 share NYSE opening and the 299,646 NYSE close, of course, was 150,000 shares and that was one of THREE six figure prints in the third market. I'll let you fantasize about how many 100 share prints you could have chased up that range.
Everyone is a "go along" trader. Nobody bids and offers at a price. Block trades are few and far between because nobody knows where the bodies lie. Execution traders trust no one with their full level of interest. I can understand protecting your interest in this day and age but we’ve ALL been wrongfully conditioned to think this is an acceptable way of trading. It is all as a result of the new market structure. It’s bad trading practice and it needs to be fixed.
In order too look like they have taken action, FINRA actually fined an HFT called Trillium $1 million dollars for carrying out illegal trading strategies 6 days after Mary spoke. This one firm potentially CANCELS 90 million orders a day - so the penalty they suffered sounds cheap to me. None of those orders had ethical intentions of either buying or selling.
In order too look like they have taken action, FINRA actually fined an HFT called Trillium $1 million dollars for carrying out illegal trading strategies 6 days after Mary spoke. This one firm potentially CANCELS 90 million orders a day - so the penalty they suffered sounds cheap to me. None of those orders had ethical intentions of either buying or selling.
The most efficient form of trading that I’ve ever seen, and had the privilege of experiencing first hand, was on the floor of the NY Mercantile Exchange. That was the late 90’s when there was still a NYMEX for energy and a COMEX for metals trading. In a sharp blue trading jacket with a mesh back, and my member badge, I traded gazillions of gold and silver futures and options. It was hectic. Actually, it was completely insane, but transacting was a pleasure because there was structure, procedure, and liquidity. Every trade was accompanied by a look in the eye, an acknowledgement, a transaction, a confirmation, a double confirmation and every contract that traded was posted up on the board for the world to see. There were no black holes on the Merc. There was transparency and more importantly there was TRUST.
There were “locals” on the bottom steps of the ring looking to provide liquidity, initiate positions on the right side of the spread, and trade for their own account. There were “paper brokers” on the top steps executing orders for the big trade houses and believe me they had contracts to trade. You knew your liquidity’s nickname, if not his actual name, his address, his cell phone number, and what his hobbies were. You knew that when you found SKI bidding or offering and looked him in the eye – he wanted to transact. You knew when DUKEY walked into the ring, that thousands of contracts were about to change hands. Having a personal attachment to liquidity was really useful and it made for great stories at the bar after the dust settled. Nobody broke the code of standing up to a bid or offer because they had to show up the next day and look the ring in the eye. If they did they break the code of trust, they were outcast and nobody dared cut off their own career like that.
It must have had something to do with the fact that orders were transmitted over the phone, human to human, that a certain bond of trust existed between a trader and his floor clerk. A trader would have a bid on his book below the market, and not have to worry about representing that interest through a broker on the exchange. All participants did it in some form and there was no harm in showing that interest. It was meant to be a wake up call in case the price moved rapidly and it meant there was a human body there with the interest to trade.
Back then gold traders (we’ll use gold as the commodity example for arguments sake) weren’t happy to trade an ounce of gold when everyone else traded an ounce of gold. They had more pride in trading than that. They picked there levels, with good reason, and stuck to the discipline of buying where they wanted to buy. In between they were spectators. When price got to a level where volume would trade, it would trade orderly, fairly, and everyone knew what they were getting themselves into. It was much easier to assess risk under those conditions. It was all made possible by traders not chasing their tails every minute of the day, at every price on the board. These guys traded like Spartans.
BID. OFFER. BUY'EM! SOLD! That’s trading.
BID. OFFER. BUY'EM! SOLD! That’s trading.
Even in my experience on the NYSE floor, as much as I hated the specialist role, as much as I tried to avoid putting his kids through college or even buying him lunch, there was a similar method to the trading floors madness. You could leave call levels in certain stocks and the specialist would “put you up” so you knew somebody had arrived at the post looking to trade at a price you may have cared. Sure, a lot of the specialists arrived at the exchange to trade stocks at 9:25 off a bus from one of the boroughs but it didn’t make them bad people, or much less effective. They were the NYSE’s market makers, by and large running pretty respectable firms like Bear Wagner, Van der Moolen, and LaBranche.
George LaBranche started trading U.S. Steel in 1901 on the outdoor curb exchange on Broad Street, and his descendant Michael LaBranche strolled the NYSE trading floor trying to be flexible, entrepreneurial, and reinvent his firm within the dynamic landscape of the market until he sold the specialist unit to Barclays in January of this year.
I’m sure Mr. LaBranche made a fortune on that trade but the money aside, I’m sure he is absolutely sick that the specialist system was replaced by anonymous electronic thievery. That’s how I feel about open outcry and I'm tired of being front-run by crooked machines in the stock market.
In fact, SOLD the machines, and I'll see you at the bar.
Bring back the Spartans.
Bring back the Spartans.
