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The most often flouted law in modern American society is Murphy's Law.
As a result, unintended consequences buffer the amber waves of the fruited plain every day, and the winds blow well beyond Yankee shores too. In essence, we foster frameworks of behavior that fail to take into consideration 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 Well being and Welfare, roughly 3 times longer.
Speaking of huge, for algorithmic trading and its tie to Murphy's Law massive thanks are owed to Joe Saluzzi and crew at Themis Trading, whose white paper linked below is sheer brilliance. Read it. You won't view your volume the exact same way once more.
Joe and his Themis cohorts describe how rebate traders (we've talked about them just before), predatory algorithmic traders, automated market place makers and programs inflate volumes and feed volatility. For sake of time, think of these as forces leveraging mathematics and speed to take benefit of the guidelines.
You could shout, "Let's outlaw them!"
Ironically, they exist given that of laws. 1, Regulation National Market place System (Reg NMS), mandates that markets meet the National Best Bid/Supply (NBBO), the perfect price offered. Therefore, systems were produced to uncover it faster, get to it faster and move it faster. So a law designed to minimize gaming in industry centers has in fact exacerbated it in techniques that were entirely unintended. Murphy's Law.
Let's focus on 1 item relevant to your Investor Relations job: rebate trading. Exchanges and market centers present incentives to attract organization. Think of it like a coupon or discount for performing business there. Because trading requires the presence of liquidity, market place centers pay firms to deliver it, around a quarter-penny per share. One unintended consequence is proliferation of firms doing absolutely nothing additional than trading to capture these rebates. Joe and his Themis professionals describe how it works:
"Our institutional investor is willing to invest in shares in a cost range of $20.00 to $20.05. The algorithm gets hit, and buys 100 shares at $20.00. Subsequent, it shows it wants to invest in 500 shares. It gets hit on that, and buys 500 much more shares.
"Based on that information, a rebate trading computer system 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 acquire 100 shares at $20.01. Whoever had been selling to the institutional investor at $20.00 is likely to sell to the rebate trading laptop or computer at $20.01. That happens, and the rebate trading laptop or computer is now lengthy 100 shares at $20.01 and has collected a rebate of ¼ penny a share. Then, the laptop or computer immediately turns about and offers to sell its 100 shares at $20.01. Probabilities are that the institutional algorithm will take them.
"The rebate trading pc makes no money on the shares, but collects another ¼ penny for generating the second give. Net, net, the rebate trading pc makes ½ penny per share, and has caused the institutional investor to pay a penny higher per share."
There's more, which includes how algorithms, which are needed for institutional execution at this time, feed predatory algorithms that front-run and game order flow, costing genuine investors cash and efficiency. Traders Magazine reports that these traders might possibly enter up to a million orders for just about every 100 executed trades. Joe and provider further clarify in the white paper.
How a great deal 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 nicely-informed Investor Relations Officer (and by extension, the rest of the management team) ought to know market structure. It's just crucial nowadays.
Lessons? You should have an understanding of your trading. And a lot more guidelines won't stop poor items. We're not advocating anarchy in the markets, or anyplace else. All games will need rules. But the significantly more complex they are, the simpler it is for a person to gain an advantage over other people. Appear at the tax code, or the welfare method.
Bottom line, Caveat Emptor and widespread sense are elixirs, not errors. Or to phrase it the way Themis Trading does, we have to have to re-discover how to watch the tape.
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