NYSE Crackdown On… You
Summary The NYSE thinks it knows what is good for you. It is going to ban a number of current trades. Some I like and others I don’t, but none should be banned. The NYSE vs. Traders The New York Stock Exchange (NYSE: ICE ) did not like what you did in August. There was all kinds of nonsense what with the buying and selling and prices going this way and that the exchange plans on cracking down early next year. Specifically, it is concerned with “price swings”. It is not taking it any more. To that end, the exchange is banning a number of popular trading tactics starting early next year. Scapegoat #1: Stop Orders On August 24, 2015, there were some such price swings in securities including JPMorgan (NYSE: JPM ) and General Electric (NYSE: GE ). One of the first scapegoats was the “stop-loss order”. A stop order is an order to place a market order once a given price is reached. For example, someone could buy a share of GE at a $30 per share with the instruction to sell it at whatever price one can get if it first goes beneath $25. While fewer than 0.3% of NYSE trades are such orders, they were thought to compound the problems in August generally and the 24th in particular. I have never made a stop order. I am certain that I never will. If I want to sell something at $25 that currently costs $30 I would not buy it at $30. That ends my interest in making such orders. But I am delighted if other people want to. In fact, many of the things that would drive a given price down to people’s stop-losses are what might interest me in buying. My colleague Andrew Walker says that he looks for opportunities, “where no one else is looking or where everyone else is panicking”. If people want to sell because a price is lower, that is fine with me. I am grateful for the liquidity in just such circumstances. In short, I try to avoid panicking, but I am staunchly pro-panic. Scapegoat #2: Good Till Canceled Orders The NYSE’s second boogeyman is the good till canceled order. Unlike stop-losses which I never use, I always use good till canceled. The distinction of one trading day versus another is wholly arbitrary to me. Essentially, I am completely price-sensitive but time-insensitive. If I find something that is meaningfully undervalued, then I want to buy it and I will still want to buy it on Tuesday. Yes, I could keep re-typing the same offer each morning at 9:30 AM, but why? If your investing philosophy is as antithetical to mine on GTC orders as it is on stop-losses, then you should be delighted with my participation in the market. I am a liquidity provider to price-insensitive/time-sensitive traders who want to exploit momentum or candlesticks or whatever. The Real Solution You might be a fan or foe of these tactics (I use one of the two). But that is not the important point. If you don’t like using them, then don’t. If you think that someone using one or the other puts himself at a disadvantage, than take the other side of the trade. But what should the exchange do if they want rational, transparent, undistorted pricing? Nothing. Get out of the way. The best, fairest, fastest solution to getting good prices is allowing for bad prices. If a share trades of JPM or GE at $0.01 per share or $1,000,000 per share, then let the trade go through. Enforce all private contracts as they are, not as the probably should be. In the Great Depression, Herbert Hoover recalled Andrew Mellon’s advice, liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people. In short, the solution to a high price is a high price and the solution to a low price is a low price. The worse thing that a government or exchange can do is to interfere with the market’s functioning so that prices are distorted. If they see an “unfair” price that is, to them, too high or too low and put a stop to it to protect one or the other party to the transaction, then they will discourage future market participants from correcting such anomalies. As for me, I buy or sell only when there is a price that is “wrong” and even “unfair”. My entire business is built around exploiting anomalies in the price system. Why would anyone ever want to pay a “right” or “fair” price? The provision of liquidity to the capital market requires the active participation of such exploitative characters. Is this selfish or unsavory? No. It is what allows people to rush out of the market if they are in a rush. It is what allows others to avoid risks that they are ill-suited to judge. It is what allows foundations and pensions and other important investors to provide for their beneficiaries when they need to. What is selfish and unsavory is when market participants demand a bailout. What they mean is that they want a do over at a price that they can live with. If they want a bailout, I am more than happy to offer a bailout as a market participant at a market price. I particularly like bailing out counterparties during maximum chaos and uncertainty. There is a perfectly functional, liquid market. Of course that is not what they mean. They do not necessarily like my price but instead want more money for themselves because they, er, um, just really want it. How is that not selfish? The market itself is the world’s fastest, most efficient and even ruthless regulator. People selling JPM or GE for $0.01 will have a whole lot less influence on markets in the subsequent days. People diligent enough to scour the markets for opportunities to buy during such opportunities will be enriched. They will increase their subsequent influence over the markets. They will motivate themselves and others to correct such mispricing in the future. The bureaucrats in the NYSE are too far away from the floor to realize that they are looking at a problem that is its own solution. Prices are supposed to swing. If you don’t like it, just let them swing and wait. If you do not distort the markets, they will swing back. Stability is a side effect of a freely functioning market, not something that can be achieved by artificial manipulation.