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Rules and Money

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There are two pillars to market intelligence: The Rules, and The Money.
By market intelligence, I mean information about what’s pricing a stock. So, translating, information about what’s pricing a stock must derive from the rules that govern stock-trading, and how money conforms to those rules.
Wouldn’t that be supply and demand? Would that it were! There are instead four big rules for stocks now, tenets of which every investor and investor-relations officer should have a basic grasp. There are data rules, quote rules, price rules and access rules.
“Quast,” you say. “This sounds about as exciting as cleaning a tennis court with a tooth brush. In Houston. In the summer.”
It can be very exciting, but the point isn’t excitement. If you don’t know the rules (always expect your market intelligence provider to know the rules for stocks), your conclusions will be wrong. You’ll be guessing.
For instance, if you report strong results and your stock jumps on a series of rapid trades, can a human being do that? Refer to the rules. What do they require? That all marketable trades –an order to buy or sell stock –be automated.
I don’t mean you can’t “hit the button” to buy or sell something at the market, a manual activity. I mean the trade must fluidly move to the price. Which requires automation.
Picture a block of cheese and a grater passing by it and shaving some off. The rule creating this reality in stocks is the Order Protection Rule, or the Trade-Through Rule. Same thing. It says traders cannot trade at $21.00 if the same stock is available for $20.99 somewhere else.
To ensure compliance, regulators have mandated that orders wanting to be the best bid to buy or offer to sell must be automated. And the bid to buy will always be lower than the offer to sell. Stocks may only trade at them, or between them.
There can only be one best price (though it may exist in several places). Now start thinking about what money will do in response. Orders will be broken into pieces. Sure enough, trade size has come down by factors, and block trades are a tiny part of the market.
Big Commandment #2 for stocks is the Access Rule. It goes hand-in-glove with the first rule because it’s really what turned the stock market into a data network. The Access Rule says all market centers including stock markets like the five platforms operated by the NYSE, the three owned by the Nasdaq, the four owned by CBOE, the newest entrant IEX, and the 32 broker markets that match stock trades must be connected so they can fluidly share prices and customers.
It also capped what exchanges could charge for trades at $0.30/100 shares –paid by brokers trading in the stock market for themselves or customers (the SEC Fee Pilot Program aims to examine if these fees, and their inverse, incentive payments, cause brokers to execute trades in ways they would not otherwise choose).
The third big rule outlaws Sub-Penny Pricing, or quoting in increments so small they add no economic value. You may still see your stock trading at $21.9999 because of certain exceptions for matching at midpoints of quotes. Reg NMS lastly imposed new Market Data Rules.
Since everyone is sharing prices and customers on this network called the stock market, plans had to be refined for pooling data-revenue (prohibiting sub-penny trading was meant to prevent a proliferation of tiny meaningless prices). Yet, data is a byproduct of prices.
There are hundreds of millions of dollars of revenue governed by the Consolidated Tape Association, which divides proceeds according to how various platforms and brokers quote and trade in accordance with best prices. Outside the CTA, there may be billions of dollars now in proprietary data feeds. These rules drive how money behaves.

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