You might think today’s title is about physical fitness. Nope.
 
I first heard the term “race conditions” used to describe stock-trading at TABB Forum, (Editorial note: TABB Forum shut down in Mar 2020, its event business victimized by the coronavirus closure.) the traders’ community, in comments around an October 2012 article there by HFT expert Haim Bodek on why high-frequency traders have an advantage.
 
Reader Dave Cummings said, responding to it, “When Reg NMS was debated, several people very knowledgeable about market structure (including myself) argued against locked, crossed, and trade-through rules because of the side-effects caused by race conditions between fragmented markets.”
 
Mr. Cummings started both BATS Global Inc., the stock exchange the CBOE is buying that by market-share the last five trading days nosed out the NYSE with 20.7% of US volume versus the venerated Buttonwood bourse’s 19.9% (the Nasdaq had 17.7%, IEX 2.2%, and nearly 40% was in broker pools), and speedy proprietary (no customers, trades its own capital) firm TradeBot.
He knows market structure.
 
Don’t tune out, investor-relations people and investors, because you need to understand the market to function well in it. Right?
 
Most people don’t know what Dave knows (that could go on a T-shirt).
 
Mr. Cummings was explaining that trading rules prohibit the bid to buy and the offer to sell from being the same. A locked market. Crossed markets are out too, by law. You can’t make a bid to buy that is higher than the offer to sell.
 
And this “trade through” thing means brokers can’t continue buying stock at $20 one place if it’s now available for $19.99 another place. The stock market today is a series of interconnected conclaves all forced to do the same thing with the same products and prices.
 
You can buy Nasdaq stocks at the NYSE and vice versa and only at the best price everywhere. ModernIR(and Market Structure EDGE)builds software and runs lots of data-warehousing functions so we know race conditions. It’s when something doesn’t happen in proper sequence, you might say.
 
For instance, a data warehouse must be updated on schedule before an algorithm processes a routine. Some hiccup in the network slows the population of the data warehouse, so the algorithm fails because data haven’t shown up. Race condition.
 
 
The stock market is similarly a series of dependent processes, some of which will inescapably fail. It means the market is barred from behaving rationally in some circumstances. What if I want to pay more for something? Or say I don’t mind getting an inferior price for the convenience of staying in one place.
 
Plus, can we trust prices? What if equity trades tied to derivatives didn’t populate someplace and the market zoomed yesterday on a process error? 
 
Again, I’m not saying it did.But the things Mr. Cummings warned would create errors in markets are cornerstones of the regulations behind the National Market System.And why can’t a bid and offer be the same? Forcing them to be different means an intermediary is part of every trade.
 
That’s why 40% of trading is in dark pools –to escape shill bids by trading intermediaries.Why would Congress –which created the National Market System –mandate a middle man for stocks, when to get a good deal you cut the middle man out? Before you trade again, stop and think it. (Editorial: This is why we built Market Structure EDGE.)
 
We have a stock market that requires an intermediary, prohibits buying and selling at the same price (unless at the midpoint between them, which is the average, which is why index-investing is crushing stock-picking), and stops investors from paying the price they want and forces them instead to take a different price.
 
It’s got to be part of your thinking.