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But the exchanges were unhappy with being institutions solely for the benefit for their members. They decided to go for-profit and allow anti-competitive behavi

by MBlume 15y ago

But the exchanges were unhappy with being institutions solely for the benefit for their members. They decided to go for-profit and allow anti-competitive behavior and destructive (but high-paying) new "customers" to suck all the life out of each day's trading with algorithmic codes. As spreads went from fractions of a share to decimals and then decimals of decimals, the profit margin for making markets in stocks gradually disappeared as well. This led to a annihilation of the market makers and specialists as well as decimation of the brokerage houses that employed analysts to cover the stocks that they traded in. The end result is that companies come public and struggle for analyst coverage, their shares are whipped about by robot traders and the whims of whatever index ETF basket they happen to be assigned to. The regulation surrounding the reporting of accurate and timely information to their public shareholders has become so onerous and expensive that they've essentially clammed up, offering only the most terse and lawyer-approved updates on their business as infrequently as they can. I don't understand what's happening in this part, except that the author doesn't like it. Can someone explain more slowly and less angrily?

mdda 15y ago
Agreed, he seems to be mixing up a bunch of stuff here. His rant about HFT seems misplaced : The market rules allow for robotic trades that whittle the bid-ask spread down to wafer-thin margins. Investors generally benefit from the greater liquidity and lower transaction spreads - compared to the situation before the minimum price increment was set so low. But he may have a (related) point when he complains that the bid-ask spread is now determined by machines (and is driven to zero) : Previously, stockbroking/marketmaking was a much more cozy operation, since there was a minimum spread that gave the occupation a base-line profitability. That's gone now. What's also been swept away is the research function that market-making (sellside) firms once provided as part of the service. There's less margin trading a single share, so there's much less incentive to try and get clients to trade those shares with you : Much better to get them to trade more exotic products... Also, regulations have stopped sell-side research people getting paid for the investment banking (money raising) part of the business. Previously, research people would follow a wide universe of stocks, and then use that as a wedge to get the (lucrative) investment banking business for their firm - think of it as salary for stock recommendations, bonus for banking. Now the cross-pollination thing is illegal, and what's basically happened is that any half-decent stock analyst gets hired away from the sellside firm by hedge-funds (where they can get paid doing what they love). Another element (the regulation FD, and Sarbanes-Oxley) part increase the cost of being a listed company for the companies themselves. RegFD means that they have to tell investors any news simultaneously (on the face of it a good thing, since it makes it clear that inside-information, or front-runnable information/whispers are a no-no). However the way it is implemented makes it a lawyer-infested process to release any information. Walking past a CFO in the street and asking "How's it going?" now results in "You need to speak to my Investor Relations department". And that transition now means that information is less timely and less comprehensive information (since the IR people are incentivized to be cautious, rather than help investors understand the underlying business). Sarb-Ox was also regulation founded on good intentions : The Board/CEO has to represent that the investor communications are full and fair (my understanding) - with the downside of going to jail. The downsides are two-fold (1) the most secure way of communicating for a CEO is to say "Here are the audited financials, I'm not saying a word more", and (2) the people that this was intended to prevent from scamming the public are largely unaffected (since they live in a world of scamming and lying anyway : what does an extra law against it matter?) Anyway : The basic (IMHO correct) ideas revolve around the unintended consequences of new regulations [that are almost always devised to tackle the last catastrophe rather than anticipate the next ones]. The rant about HFT seemed out-of-place.
- MBlume 15y ago
  Thanks! That made a lot more sense.

by MBlume 15y ago

mdda 15y ago

Agreed, he seems to be mixing up a bunch of stuff here. His rant about HFT seems misplaced : The market rules allow for robotic trades that whittle the bid-ask spread down to wafer-thin margins. Investors generally benefit from the greater liquidity and lower transaction spreads - compared to the situation before the minimum price increment was set so low. But he may have a (related) point when he complains that the bid-ask spread is now determined by machines (and is driven to zero) : Previously, stockbroking/marketmaking was a much more cozy operation, since there was a minimum spread that gave the occupation a base-line profitability. That's gone now. What's also been swept away is the research function that market-making (sellside) firms once provided as part of the service. There's less margin trading a single share, so there's much less incentive to try and get clients to trade those shares with you : Much better to get them to trade more exotic products... Also, regulations have stopped sell-side research people getting paid for the investment banking (money raising) part of the business. Previously, research people would follow a wide universe of stocks, and then use that as a wedge to get the (lucrative) investment banking business for their firm - think of it as salary for stock recommendations, bonus for banking. Now the cross-pollination thing is illegal, and what's basically happened is that any half-decent stock analyst gets hired away from the sellside firm by hedge-funds (where they can get paid doing what they love). Another element (the regulation FD, and Sarbanes-Oxley) part increase the cost of being a listed company for the companies themselves. RegFD means that they have to tell investors any news simultaneously (on the face of it a good thing, since it makes it clear that inside-information, or front-runnable information/whispers are a no-no). However the way it is implemented makes it a lawyer-infested process to release any information. Walking past a CFO in the street and asking "How's it going?" now results in "You need to speak to my Investor Relations department". And that transition now means that information is less timely and less comprehensive information (since the IR people are incentivized to be cautious, rather than help investors understand the underlying business). Sarb-Ox was also regulation founded on good intentions : The Board/CEO has to represent that the investor communications are full and fair (my understanding) - with the downside of going to jail. The downsides are two-fold (1) the most secure way of communicating for a CEO is to say "Here are the audited financials, I'm not saying a word more", and (2) the people that this was intended to prevent from scamming the public are largely unaffected (since they live in a world of scamming and lying anyway : what does an extra law against it matter?) Anyway : The basic (IMHO correct) ideas revolve around the unintended consequences of new regulations [that are almost always devised to tackle the last catastrophe rather than anticipate the next ones]. The rant about HFT seemed out-of-place.

MBlume 15y ago
Thanks! That made a lot more sense.