Today’s daily stumble landed an interesting article about the “complicated” stock market order types and the alleged preferential order routing taking place by institutional traders for preferred clients. While this would be another bombshell if it is true, I would question whether it is entirely surprising.
The reality of stock markets is that they are filled with armies of programmers and mathematicians. The same technological innovations that have enabled competitors to enter the discount brokerage market and drive down commission pricing, have also enabled new methods of extracting value from financial transactions. If, as the exchanges claim, the data feeds and order types are all efficiently published, then the system as a whole is transparent and there is no harm being done. In this case, there happens to be sophisticated market observers who could give themselves a mathematical advantage by monitoring how, where and when a trade gets executed. Perhaps they’re just simply doing their homework. Should they be penalized for that? The crux of the debate, I believe, will come down to whether any systematic preferential routing is taking place or if there are just some savvier participants taking advantage of the rules. Unless there are some clear smoking gun emails, however, it won’t be easy for regulators to untangle that at all.
The competition in the stock market is true of competition in most places – it drives innovation. Even though seeking an advantage at the expense of ‘fair play’ isn’t exactly ethical, neither are stock markets. It sort of brings to mind all the ‘diving’ we often witness in professional soccer (and sometimes hockey too) – some of the “best” players do it and leave it to the referees to enforce it and even though fans might be outraged once in a while, they keep watching and the game keeps on going. Of course, as the MADtv character Bon Qui Qui so elegantly points out here, sometimes complicated orders can cause all kinds of problems too, and the right call is to call in security.