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The most regularly flouted law in contemporary American society is Murphy's Law.
As a result, unintended consequences buffer the amber waves of the fruited plain day-to-day, and the winds blow properly beyond Yankee shores too. In essence, we foster frameworks of behavior that fail to consider side effects.
Illustration: You have heard that the IRS Code, which is Title 26 (of 50 total) of the United States Code, is 67,000 pages long? It is not the greatest. That, er, title goes to Title 42, Public Health and Welfare, roughly 3 times longer.
Speaking of huge, for algorithmic trading and its tie to Murphy's Law substantial thanks are owed to Joe Saluzzi and crew at Themis Trading, whose white paper linked below is sheer brilliance. Read it. You will not view your volume the identical way again.
Joe and his Themis cohorts describe how rebate traders (we've talked about them before), predatory algorithmic traders, automated market place makers and programs inflate volumes and feed volatility. For sake of time, believe of these as forces leveraging mathematics and speed to take benefit of the rules.
You might shout, "Let's outlaw them!"
Ironically, they exist given that of laws. 1, Regulation National Market Method (Reg NMS), mandates that markets meet the National Top Bid/Give (NBBO), the finest price readily available. Therefore, systems had been produced to get it faster, get to it quicker and move it faster. So a law created to reduce gaming in marketplace centers has in fact exacerbated it in approaches that had been entirely unintended. Murphy's Law.
Let's focus on 1 item relevant to your Investor Relations job: rebate trading. Exchanges and market centers give incentives to attract business enterprise. Believe of it like a coupon or discount for doing company there. Given that trading calls for the presence of liquidity, industry centers pay firms to give it, about a quarter-penny per share. 1 unintended consequence is proliferation of firms performing absolutely nothing additional than trading to capture these rebates. Joe and his Themis professionals describe how it works:
"Our institutional investor is willing to acquire shares in a price range of $20.00 to $20.05. The algorithm gets hit, and buys 100 shares at $20.00. Next, it shows it wants to obtain 500 shares. It gets hit on that, and buys 500 additional shares.
"Based on that details, a rebate trading computer program can spot the institution as having an algorithmic order. Then, the rebate trading computer runs ahead of the algo by a penny, placing a bid to invest in 100 shares at $20.01. Whoever had been selling to the institutional investor at $20.00 is most likely to sell to the rebate trading pc at $20.01. That happens, and the rebate trading pc is now long 100 shares at $20.01 and has collected a rebate of ¼ penny a share. Then, the laptop or computer quickly turns around and gives to sell its 100 shares at $20.01. Chances are that the institutional algorithm will take them.
"The rebate trading pc makes no cash on the shares, but collects another ¼ penny for making the second offer. Net, net, the rebate trading pc makes ½ penny per share, and has brought on the institutional investor to pay a penny higher per share."
There's more, which includes how algorithms, which are required for institutional execution nowadays, feed predatory algorithms that front-run and game order flow, costing genuine investors capital and efficiency. Traders Magazine reports that these traders may possibly enter up to a million orders for each 100 executed trades. Joe and organization further clarify in the white paper.
How a lot of this activity is occurring in your own stock? You'd no doubt be surprised, as our customers frequently are. This is why we hound the notion that the properly-informed Investor Relations Officer (and by extension, the rest of the management team) should know industry structure. It is just important nowadays.
Lessons? You need to understand your trading. And significantly more guidelines will not quit bad things. We're not advocating anarchy in the markets, or anywhere else. All games require guidelines. But the a lot more complex they are, the less complicated it is for a person to gain an advantage over others. Appear at the tax code, or the welfare program.
Bottom line, Caveat Emptor and frequent sense are elixirs, not errors. Or to phrase it the way Themis Trading does, we have to have to re-understand how to watch the tape.
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