> But Jack has no god-given right to be able to buy shares at the price he likes best
It seems like the disagreement really lies here. I'm not a finance expert so I'll probably get a few things wrong but is it fair to summarize the two perspectives as follows?
1. Jill is merely quoting a price for independent blocks of shares on independent exchanges. If a buy order is placed against that quoted price, she has the right to reissue quotes elsewhere. This is no different from Jill selling apples at the market on 1st street, as well as at the market on 2nd street, then receiving a large order on 1st street that prompts her to call her sales manager on 2nd street and have him increase the price of apples there. Or for Janice, sitting next to Jill's stall on 1st street, overhearing the sale at $17 and repricing her apples upwards for when the demand inevitably spills over to her stall.
2. Jill is making an offer to sell a combined block of shares at a particular price. Even though her offer is broken up over multiple exchanges, since a single buy order can execute on multiple exchanges her offer should hold across all of these exchanges. Yet she is taking advantage of the physical makeup of the market to bait large orders (thereby revealing market demand) and then switch to higher prices (thereby capturing a larger profit).
I emphasized "quote" and "offer" above because they capture two different concepts in contract law. I'm not sure if the concepts are the same in financial markets but the principle seems to be at the root of the disagreement. If Jill was merely "quoting", unless the rules of the exchange specify otherwise, she is free to reissue her quote and therefore perspective #1 makes sense. If Jill was making an "offer" however, presumably she should be bound to the terms of her offer regardless of the physical details around how she publishes that offer, reinforcing perspective #2.
So: do the market rules have such a distinction? I found the link [1] below which suggests both perspectives are valid - depending on the type of market one is participating in, if I understand it correctly. Is this a matter of people confusing the two types of markets? (I have to say that perspective #2 seems pretty impractical to me in markets with multiple exchanges participating, and #1 doesn't negatively impact the market -- either it makes economic sense for Jack to pay the new price or not, why do we care if he saves a few bucks if we fiddle with the rules?)
I don't know much about contract law, but it may be interesting to know that a resting order on exchange, with a set price and size, is called a quote.
The terminology offer is used in financial markets for a resting order to sell, distinguishing it from a bid which is a resting order to buy, although many market participants will actually use the terms bid and ask rather than bid and offer. Whether this is to avoid confusion with the contract law term, I have no idea.
It won't surprise you to learn that I also think that your perspective #2 is unworkable in a situation where you have multiple exchanges (how would it work - would you require that quotes on exchange B must remain for a specified period after a quote on exchange A is hit? That doesn't seem sensible).
It is supposed to be the case that you do not place orders on an exchange that you have no intention of executing. i.e. if you place an offer which you intend to withdraw then replace with a higher one the moment you detect interest in the offer then you are breaking the rules.
In general it's also pretty scummy to do it. Imagine a shop seeing you taking items from shelves at an advertised price and saying "Well that shows there's demand in these goods so we're raising the prices on everything in the customers basket before they get to the checkout."
That is not at all true. It is perfectly legal and valid to place quotes at a price that you expect is valid and change them once interest is detected. This is a standard market dynamic and one that makes the markets work.
Your analogy is not all how HFT works. A better analogy would be a string of gas stations going down the highway. A tanker truck comes to the first one and buys all it's gas. Then the second one, and then the third. The manager at the third station calls the fourth and tells them to raise their prices. How is it scummy to do that, but not to buy up all the gas at what is clearly a too low price?
Best Buy runs a flier with a price. You walk in, and Best Buy tells you they're not selling that product at that price... but they do have it in inventory at a higher price.
You drive up to a gas station, listing one price on its sign. By the time you pay, they've changed the price.
You see a house for sale. You make an offer, at that exact amount. There are no higher competing offers, but they want to back out.
You have legal recourse in each of those situations.
1) That's not because Best Buy isn't allowed to change prices. There's even fine print on their marketing that says the prices on the flyer are marketing only and may or may not match pricing when you get to the store. They just choose not to most of the time for marketing reasons.
2) Actually, at least in New York there are no regulations that discuss the large roadsign pricing signs at gas stations. The law just says the price on the pump must match what you get charged. If they change the price at the pump but get behind on updating their big sign you are SOL.
3) People back out of selling houses all the time.
And for all of these it's worth pointing out that what we're really arguing about is time scale. No one would argue that the gas station (for example) wasn't allowed to sell gas for a different price today than it charged yesterday right?
Bid and ask prices for securities just change prices faster than what we're used to for retail products.
To really expand the scope of this discussion it's worth noting that time scales for retail product price changes are actually shrinking. Walmart has experimented with electronic labels in stores that allow them to change prices in real time. Uber changes prices in real time based on demand. It's interesting to watch consumer reaction to these new trends.
There's still bait-and-switch lawsuits... so advertising has some legal binding. I guess all advertisers know how to write in enough small print to get around it now, huh?
And I guess securities don't have any "this offer good for [x seconds]" on them. That's totally counter-intuitive to laymen, and speaking as a professional layman, I'm pretty sure I'm getting screwed because of it.
Electronic labels - you should be able to reserve a price for a time. Like, you want that shaving cream for $1.45, then you should be able to scan your Walmart member card at the electronic label to reserve that price. Should be valid for an hour, or a day, for up to X number of them.
...because the nightmare of picking it off the shelf, and the price is different when you check-out is just awful for consumers.
...and just to ramble a bit more... Sometimes it's cheaper for me to DRIVE to City A, fly back to my town, and then fly to my real destination than it is to book a flight from my town to my real destination. That's crazy, and I'm totally getting screwed, and I hope laws are enacted to stop that.
Ya, I get the whole "as a professional layman, I'm pretty sure I'm getting screwed because of it" when it comes to HFTs. But if you look at the actual data it's blindingly obvious that the exact opposite is happening. Trading costs have come down enormously!
Iit would be nice if folks looked at the data instead of falling back on their irrational gut logic.
Huh? The rule is you can't place orders that you have no intention of executing at the time you place them. You're perfectly entitled to change your mind afterwards, or adjust your price as new information becomes available. You just can't place orders when it is your goal to not have them execute, and that was your goal before you even sent them.
It seems like the disagreement really lies here. I'm not a finance expert so I'll probably get a few things wrong but is it fair to summarize the two perspectives as follows?
1. Jill is merely quoting a price for independent blocks of shares on independent exchanges. If a buy order is placed against that quoted price, she has the right to reissue quotes elsewhere. This is no different from Jill selling apples at the market on 1st street, as well as at the market on 2nd street, then receiving a large order on 1st street that prompts her to call her sales manager on 2nd street and have him increase the price of apples there. Or for Janice, sitting next to Jill's stall on 1st street, overhearing the sale at $17 and repricing her apples upwards for when the demand inevitably spills over to her stall.
2. Jill is making an offer to sell a combined block of shares at a particular price. Even though her offer is broken up over multiple exchanges, since a single buy order can execute on multiple exchanges her offer should hold across all of these exchanges. Yet she is taking advantage of the physical makeup of the market to bait large orders (thereby revealing market demand) and then switch to higher prices (thereby capturing a larger profit).
I emphasized "quote" and "offer" above because they capture two different concepts in contract law. I'm not sure if the concepts are the same in financial markets but the principle seems to be at the root of the disagreement. If Jill was merely "quoting", unless the rules of the exchange specify otherwise, she is free to reissue her quote and therefore perspective #1 makes sense. If Jill was making an "offer" however, presumably she should be bound to the terms of her offer regardless of the physical details around how she publishes that offer, reinforcing perspective #2.
So: do the market rules have such a distinction? I found the link [1] below which suggests both perspectives are valid - depending on the type of market one is participating in, if I understand it correctly. Is this a matter of people confusing the two types of markets? (I have to say that perspective #2 seems pretty impractical to me in markets with multiple exchanges participating, and #1 doesn't negatively impact the market -- either it makes economic sense for Jack to pay the new price or not, why do we care if he saves a few bucks if we fiddle with the rules?)
[1] http://www.investopedia.com/ask/answers/06/quoteorderdrivenm...