A few of you are aware that in a previous life, I worked for a major equity trading venue (not the NYSE – think #2) doing programming and software design of electronic order matching (trading) systems. People who personally knew Bernie Madoff from when he ran that market in the early 1990s made it clear they would rather I leave and stop pestering them about planning for the future – things like in 2000 and 2001 having a real disaster recovery plan in the event of a terrorist attack that destroyed our facility) – so it made my decision to leave in 2002 that much easier.
Many politicians – and radio people like Bob Brinker and Michael Savage – believe one of the root causes of the past year’s collapse of equity prices is to the end of a quaint rule called the “Short Sale Uptick Rule”.
Without getting completely boring, the purpose of this rule in the 1930s was to allow the person who manages a stock on the NYSE (call the Specialist) to prevent a sudden fall in the stock of a price – by people who wanted to bet that the price will go down further by creating a stampede. 70 years ago, this was a really great idea to avoid market instability and prevent 1929 from happening again.
If you wanted to sell IBM stock 40 years ago, your order was sent to New York on a teletype, printed out, hand carried to the specialist on the floor, and he would find a buyer or if nobody was buying – the specialist would directly buy your stock at a price that HE set. Pricing information was delayed 15 or 20 minutes to the general public, so he had a lot of time to “work things out”. Your sale reported on the “stock ticker”, a machine at your local stock broker so they could keep somewhat current on the day’s trading.
By controlling what traded when and at what price, the specialist (one person) could block a surge in selling using the “tick” when he did not want to be the buyer (because he also believes the price is headed down and wants to get the prices adjusted lower first and get out of the way in the 15 minute window before the entire world found out).
So if this rule was working so well to prevent market panics, why did the SEC allow exchanges to get rid of it in 2007? The main answer: Electronic trading. Only the most inefficient markets now involve human decision making to routinely manage the trading of a market. Note that “program trading” and “electronic trading” are different things. Program trading is the computers for a customer making automated decisions to buy and sell. Electronic Trading is the actual matching of buy and sell orders. You don’t need electronic Trading to do Program Trading – but it does make it faster and potentially more dangerous to market stability.
With automated trading in 2009, the last sale price (which controls the uptick rule) can go up and down 100s of times a second. That crawl you see on the cable TV channels is no more real than the Pirates of the Caribbean ride at Disneyland. It’s nothing but a snapshot of some recent stocks at a speed the human mind can absorb.
A TV picture only updates 30 times a second (computer monitors typically are 70-90 times/second). You just can’t enforce a rule like the uptick rule – even if you still thought it was a good idea. A human being cannot absorb information at 100 times a second and certainly can’t click a mouse at the “right” time to not break the rule.
Just how is an electronic market so different in 2009? Here are the specs for the Universal Trading Platform that NYSE Euronext is rolling out in Europe, and recently replaced the ARCA trading system that trades NYSE stocks in Chicago (not New York, Andrew Cuomo)
“Customers trading on NYSE Euronext European cash markets will realize reduced latencies […] of 150-400 microseconds per roundtrip on the Universal Trading Platform . In addition to delivering exceptionally fast transaction speed and system-wide reliability, the Universal Trading Platform sets new industry standards for capacity with the ability to handle 100,000 orders per second.“ (The system my group designed in 2001 was shooting for a target of 150 matches per second)
To put this in context, light (and electricity) travel at 186,000 miles per second. In 400 microseconds, electricity travels only 74 miles. 400 microseconds is their “worst case” total time for the Euronext UTP to get an order, match it and give the answer back to the buyer and seller.
There are other reasons the Uptick rule also makes no sense in 2009 – because stock options, single stock futures, ETFs (like SPDRs and contra ETFs that bet on an index going down) and a variety of other financial products allow people to “bet the market will keep going down” without any regard to whether the last sale that happened 572 microseconds ago was at a better or worse price than the 2nd older sale.
Making things even uglier – there is no such thing now as “the exchange” where a stock is traded – no more than there is an “American Car”. There are multiple trading platforms all trading the same stock at the same time all over the world. By the time each trading venue “hears” about the last trade at another exchange, it is probably no longer the most recent trade.
This is why I described the NYSE trading floor as nothing but a TV studio living out the quaint fiction for the masses that there is still a trading floor. Any humans you see on the floor are there for very little reason in 2009, and with each passing day there is less and less reason for humans to stand around on “Wall Street” in New York City.
Mayor Bloomberg, Governor Paterson and Andrew Cuomo have no leverage over “Wall Street”to keep them under the jurisdiction of any part of New York State goverment – they just are too blinded by their own desire for power to realize it yet. That’s especially odd in the case of Mayor Bloomberg – since his fortune was made on selling information to people on Wall Street, and knows every detail of the business.
The Federal Government only has nominally more control because it controls the creation of US dollars by the US Treasury and Federal Reserve. That power card has now been put on the table for the last time. Globalism is going to win this fight, and that’s not a good thing if you believe in the values of the United States, individual freedom and representative government based on our national interests.
But to finish on a positive note, Congress did solve that problem with Baseball Players taking steroids and Michael Vick is in jail for those dog fights. We need to keep the inportant issues in focus. Who do you think is going to win American Idol this season?