Daily Speculations

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06/15/2004 Jared Albert: Ever-Changing Rules

I believe that one aspect of the ever-changing nature of the equity markets is the ever-changing rules for trading it.

I think, in some respects, that its not only that inefficiencies are discovered and made efficient, but also that the rules are changed to limit inefficiencies external to the old-guard structure that historically has facilitated the trading. And take more energy out of the system from lower down the food chain (me).

Here are some examples from the last few months to illustrate my case.

1) In November the SEC ruled against the use of married-puts, a very valuable tool for protecting long stock from short sale violations in fast markets and for selling short on the bid.

2) In the last few weeks, the SEC has pressured direct access electronic brokers to eliminate the ability to sell long stock market and hit bids on ECNs. Previously, this was allowed, even if it generated short sale exceptions.

3) All ECNs have eliminated sub-penny increments, another formerly useful way to short just above the bid on listed stocks, or get out in front of others orders.

I suppose the extreme example of changing the rules to protect the status quo, would be the COMEX and the CME disallowing buying of silver except to cover during the Hunt brother manipulation of silver (of course they were creating an enormous inefficiency and violated position limit rules, I believe).

I could be wrong, but it also seems to me that the rate of change of creating new rules, some to add transparency, some to take away evasive ability of the blue-green algae, has been increasing in the 9 odd years I've been trading equities. It took ~15 years to go from negotiated commissions to 16ths and to lessen the flagrant price fixing. Then only ~5 years to go to decimals. Nasdaq Level 2, ECNs, and NYSE open book happened in the blink of an eye, same with extending the trading day.

Just like in other industries, the rate of technological change continues to increase. I suppose that for someone who can stay on top of this aspect of the changing cycles, new opportunities to game the system will present themselves.