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The Hard Truth: For Retail Investors, The NYSE Is Always Out Of Service

Tyler Durden's picture




 

Submitted by Nanex,

1. Charts of the Event.

On July 8, 2015 at 11:32:57, trades and quotes stopped updating from the NYSE. Trading eventually resumed at 3:10pm.

Timeline up to the halt.

Trades from NY-ARCA (red) and NYSE (blue) when NYSE halted (note the disappearance of the blue dots).

NYSE trades when NYSE halted. (This is the chart Stephen Colbert used on the The Late Show)

NYSE trades when NYSE resumed.


 

2. Does the NYSE matter? The Importance of NYSE's Quote.

On a typical trading day, quotes from the NYSE set the NBBO (National Best Bid/Offer) more than 60% of the time - beating out 10 other exchanges. You would think that losing NYSE's quote would severely impact the Retail Investor's trading experience.

Below is the same chart as above but on the day of the NYSE halt. Right at the open we can see there's a problem. Then NYSE's quote disappears, mostly replaced by Nasdaq.

There is also this excellent study of how trades fared among different exchanges, which is worth reading. What they found: the NYSE has great executions compared to other exchanges.


 

3. The Halt's Impact on Retail Investors: Experts and Spin.

"Even though the NYSE floor is down, the NYSE Arca exchange is still operating.
A retail investor who wants to trade Exxon will see no impact from the outage.
"

James Angel, Georgetown business school finance professor to Business Insider

The Street.com article below is representative of how most main stream news media were spinning the NYSE halt story: Retail was having a rough day! It's hard to fault them, given how important NYSE's quote is for NYSE stocks.

Later in the day, when no evidence surfaced of Retail Investors having trouble, a few began questioning the news spin.

When it was clear that Retail Investors weren't impacted, the search was on for what was behind the miracle "success story".

Without any evidence or a basic understand of retail order execution, some went so far as to claim stock market fragmentation saved the day. (We think Pisani got it dead wrong).

Naturally, Modern Markets, the High Frequency Trading (HFT) Lobbyist, was quick to claim another benefit of HFT!
They saved the day! Naturally. For a good look at how far lobbyists will go to spin a story (and probably more disturbing, how far a major network will let them), please watch this short video.


 

4. The Hard Truth: To Retail Investors, the NYSE is Always Dark.

A few of those who really understood where retail stock orders execute spoke the truth:

But wait a minute, can Chris Nagy be right? After all, we know that the NYSE sets the best prices more than 60% of the time. Without NYSE's best prices, there had to be some harm, right?

Retail orders execute on the NYSE, right?

Well, in a word: NO.

What the news media conveniently (or intentionally) forgot to ask and investigate:

What really happens to the Retail Investor order?

Answering part of that question is a simple matter of searching SEC required 606 reports from each retail broker.

The following list is by no means complete. For brokers not listed, simply Google "BrokerName 606 Report".

Here's what we found:

1. Schwab Doesn't Route to NYSE

2. Vanguard Brokerage Doesn't Route to NYSE

3. E*Trade Doesn't Route to NYSE

4. Fidelity Retail Brokerage Doesn't Route to NYSE

5. Scottrade Doesn't Route to NYSE

6. Credit Suisse (Private Client Services no less) Doesn't Route to NYSE (or anywhere else!)

7. Morgan Stanley Wealth Management Doesn't Route to NYSE

8. Edward Jones Doesn't Route to NYSE

9. Northern Trust Doesn't Route to NYSE

10. Wells Fargo Doesn't Route to NYSE

11. Lightspeed Doesn't Route to NYSE

12. TradeKing Doesn't Route to NYSE

13. Citigroup Doesn't Route to NYSE (Note: Citi isn't retail, but as they own ATD we found this very interesting)

Now you know why Retail Investors didn't have a problem with the NYSE being out of service - retail orders rarely route to the NYSE.

For Retail Investors, the NYSE is ALWAYS OUT OF SERVICE.

Which leads to the inevitable question..


 

5. Where Do Retail Investor Orders Go?

The simple answer: to the highest contracted bidder. Stock "wholesalers" or internalizers like Citadel or Knight pay retail brokers lots of cash to execute retail trades, essentially creating a "third market". Why? Because in a high frequency trading world, where stock prices have never been more fuzzy to the end user, but crystal clear to those that spend enormous sums on colocation and PhD employees, it's never been easier to print money (not unlike Bernie Madoff's scheme in the 90's). But that is the subject of a much, much longer story. Someone should write a book.

In the meantime, we strongly encourage you to read this fabulous guide, written by an industry insider. This guide shines much needed light on how Wall Street treats (games) each type of Retail Investor order.

 

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Thu, 07/23/2015 - 18:31 | 6347030 venturen
venturen's picture

Retail Invest....I think you meant retail lemming.

Thu, 07/23/2015 - 18:34 | 6347040 johngaltfla
johngaltfla's picture

So just WTF are those old fucks who appear on CNBS doing all the time when they are not on the teevee? Circle jerking?

Thu, 07/23/2015 - 18:46 | 6347063 wee-weed up
wee-weed up's picture

This is a known fact. It has been happening for quite awhile now. HFT is the 500 lb gorilla on Wall Street. If you want to know how the market REALLY works read "Flash Boys" by Michael Lewis. It will open your eyes.

Thu, 07/23/2015 - 18:50 | 6347079 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

The Invisible Hand(job) of the Market------not what Mr. Smith had in mind IMHO.

Thu, 07/23/2015 - 18:43 | 6347060 I Write Code
I Write Code's picture

My Schwab executions have been pretty good, if you're not a big player maybe this doesn't matter much or at all.

Thu, 07/23/2015 - 18:56 | 6347102 PrimalScream
PrimalScream's picture

NO ... someone should not write a book.

Someone should file a CLASS ACTION LAWSUIT.

And sooner or later one bright young ambitious attorney is gonna do the following math:  30% x $1 billion lawsuit = $300 million

Enough said?!!

I am very surprised this has not been done.  But it will be.

Are there any attorneys out there with brains and a LOT of desire to get ahead?

Thu, 07/23/2015 - 20:26 | 6347334 Manthong
Manthong's picture

attorneys are venal bastards that usually only work for money up front

I think it is like attorney 401 class instruction

maybe we can crowd source this

and.. where do most of the evil politicians come from?

 

Thu, 07/23/2015 - 19:12 | 6347156 armageddon addahere
armageddon addahere's picture

So what is new? Don't tell me you didn't know the specialists in the old open outcry markets used to take advantage of retail traders.

The commission and skim we pay today is a fraction of what they paid in the seventies and before.

Thu, 07/23/2015 - 20:48 | 6347439 nanex
nanex's picture

That old canard? What a useless post. You add ZERO information and ZERO imagination. You'll get no where comparing everything to the past and not the future.

 

nanex

Fri, 07/24/2015 - 13:00 | 6349531 armageddon addahere
armageddon addahere's picture

You got that right. I do compare things to the past.  Now tell me O wise one what will happen in the future? Tell me what the S&P will close at next week and I will make the comparison.

Thu, 07/23/2015 - 19:26 | 6347204 howieg
howieg's picture

I cannot figure out if the people that post do not trade and just do not know or just like to agree with all the schills out there. No one sends orders to NYSE because you get lousy fills and brokers do not want to explain to clients why. 

 

Second people really do trades quickly learn you NEVER EVER do market orders, so who cares where it goes .. If the NBBO moves 1 tick in your favor on a limit order it has to be filled. 

 

These guys at Nanex always have an axe to grind. They just have old tech and cannot afford to upgrade. If you trade things like the Spy you get fills between the bid and ask and the bid ask spread is only a penny. These guys at Nanex and NYSE just want the spreads to go back to nickles and quarters so they can rape us like they did before Arca and the others. Thank you Mich Lewis for mis informing the public so you could see yet another book of bullshit.

 

 

Thu, 07/23/2015 - 20:45 | 6347430 nanex
nanex's picture

I dare you to say that with your real name, Mr. Anonymous coward.

The NYSE has lousy fills? Not according to the LINKED Battallio paper. But that would require reading, and I know (gasp) THINKING.

nanex

Thu, 07/23/2015 - 20:03 | 6347298 kchrisc
kchrisc's picture

The streeters' motto: "If Zion's banksters or government don't rob you blind, we will."

Liberty is a demand. Tyranny is submission..

 

"My dear sheeple! Step right up, and see the opportunity of a lifetime. You, yes you, can be the first. In on on the ground floor; The first with claims to the handsome profits to flow forth like a river. What do I push? What do I exclaim? Well, the ever-ready, heavy-duty, all automatic mutton making machine is what. You like mutton, right? Yes! We all like mutton. So get into this opportunity, as it will only knock once; The next time will be a SWAT team. So call today. 1-800-CORZINE. Just give your name and address, as we already have your bank account details."

Thu, 07/23/2015 - 22:18 | 6347729 Redart
Redart's picture

Using marketable limit orders for the last 20 yrs with no regrets. Who cares if broker get 1cent or one tick per order. Go open a burguer shop and see how much you pay for utilities and rent. Comissions for trading are pennies, unless a retail investor will be trading for tick profit. He should know better that in this case he will be broke by market adversity in a matter of days or months. And this way he loses the reason to critizise HFT. Thank god that market today trades mostly by NBBO. it simplifies aaaaaa lot of stuff regarding microstructure. We should be thankful for that too.

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