Start the conversation
Nobody cheered harder than I did for the Redditors and retail investors when they dealt a couple of leveraged-up hedge funds a bloody nose, then took them down to the mat. If you've been with me for a while, you know how strongly I believe in the free market – and a free market is a democratic market.
Let me be clear about this: Anyone who wants to should be able to be in the market, build wealth, and, ultimately, contribute to the great American experiment and experience; that privilege shouldn't be reserved for Wall Street insiders or "elite."
But the truth is, as exciting as it was, GameStop wasn't exactly decisive – it was just a skirmish in the wider war to make our capital markets more accessible to everyone.
One of the most powerful weapons in the market wars is information. Data. It might not be the most thrilling idea, but good information can mean the difference between a winning trade that pays off big time, or a great investment that keeps paying off over and over… or watching money go down the drain.
The way things stand now, Wall Street has the goods. High-frequency traders, hedge funds, banks – they pay a lot of money for this, let's call it "proprietary" data – they have it, and they don't want you to get your hands on it.
So there's a two-tier system at work. It's fundamentally unfair, and it's certainly an "unfree" element in what should be a free market.
But that may be changing.
The Securities and Exchange Commission is fighting, hard for a change, to make sure regular investors get a crack at the data that made Wall Street $28 billion in profits in the first half of 2020 alone.
Here's exactly what you need to know, and what you should do about it…
There's Important, Actionable Information at Stake Here
The big exchanges publish two sets of data in what regulators and detractors, including yours truly, call a "two-tier system."
First off, exchanges receive thousands, sometimes millions, of orders every second of every day; orders to buy and sell specific amounts of stocks at specific prices. They take all the bid and offer data coming into their "pipes" and consolidate it into what's called the National Best Bid and Offer, the NBBO.
RELATED: We've seen how retail traders could generate more volume than institutions. It's helped give rise to the "Super Squeeze" trade that's taking the markets by storm. Learn more about it here…
The NBBO shows how many shares of a stock are being bid for at the highest price and how many shares are being offered at the lowest price. That's what the public sees.
But there's more… and I mean a lot more.
Exchanges naturally have all the bids and offers, and all the size amounts being bid and offered at all prices. All that data constitutes "the book." Because there are many levels of bids and offers, seeing that data, or into the "depth" of the "book," is really what matters. This "deep book" data gives whoever or whatever views it (meaning computers) vastly enhanced insight into whether there's more buying interest or selling interest, at whatever price levels, in any stock.
Exchanges sell "deep book" data for a lot of money; these are the so-called "private feeds" the big boys pay through the nose for.
And there we have it: a two-tier system of stock data.
Now, everyone knows I'm not the biggest fan of the SEC, but I've got to give credit where it's due: They're fighting the good fight when they insist that everyone should have access to at least some of this book data.
Here's What the SEC Wants
Back on Feb. 14, 2020, the SEC filed a 600-page rule change proposal regarding important stock price data the exchanges control. The February 2020 rule proposal was approved by a unanimous vote of the SEC's five commissioners on Dec. 9, 2020. The new rules now face a 60-day comment period.
Here are the most important rule changes:
- Exchanges would be required to show buying and selling interest, not just at the current bid-offer price for a stock, or the NBBO, but at the next five price levels up and down. That "depth-of-book" data can show, for example, whether buy orders for a stock are thinning out, which could mean a falling price.
- Exchanges would also have to make available their book data on every stock to so-called competing consolidators, and to broker-dealers who would be free to consolidate that data on their own.
- And, under the current system, securities information processors (SIPs) only display the best bid and offer prices for "round lot" orders, those in multiples of 100 shares, such that investors don't see buyers or sellers quoting prices for stocks in quantities smaller than 100 shares, called "odd lots." The SEC's new plan redefines what counts as a round lot. In the case of stocks with share prices above $1,000 but no higher than $10,000, a round-lot order could be just 10 shares. That will force SIPs to display more detailed quote data for stocks.
All that is to say that information once kept behind closed doors and paywalls would go public.
Of course the exchanges, painfully aware and nervous as hell that the tail has been wagging the dog lately, are suing six ways from next Tuesday to try and keep these regulations from being enacted.
The Exchanges Are Fighting for Their Profits
The week before last, in parallel court filings, the New York Stock Exchange, which is owned by Intercontinental Exchange Inc. (ICE), Nasdaq Inc. (NASDAQ), and CBOE Global Markets Inc. (CBOE) sued the SEC in the U.S. Court of Appeals for the District of Columbia Circuit.
They're claiming the SEC's rule changes are "overreach" and amount to unconstitutional seizure of property.
PREDICTION: These five stocks could grow by $353 billion in just 18 months – learn how to get in before they have an explosive run. Watch…
So why should the exchanges care if at the end of the day hedge funds and, say, a guy trading fractional shares of TSLA on his iPhone have the same data?
Well, the exchanges have billions of reasons to fight. What's at stake for them is revenue, a lot of revenue from selling deep book data.
In 2020, "Information Services" commanded $6.8 billion in revenue for the global exchanges; that's 18.85% of their total revenue. That's up from 12.8% of revenue in 2010, according to Burton-Taylor International Consulting.
"The rule is arbitrary, capricious and otherwise not in accordance with law and does not promote efficiency, competition and capital formation," the NYSE said in its suit.
A spokesperson for Nasdaq echoed the sentiment in a statement to The Wall Street Journal. "The SEC exceeded its authority with this ill-conceived remake of market structure," they said. "This will make markets more complex and costly." CBOE and the SEC declined to comment on the litigation.
To say this rule change would "level the playing field" for retail investors and traders is a huge understatement.
No wonder the exchanges are fighting for the right to sell important data to deep-pocketed players.
A Victory Here Would Be Bullish for Retail Investors
Deep book data can tell you which way a stock might trend because you can see all or at least five levels of the bids and offers, as well as the size of the orders out there. As it stands now, the Wall Street firms with access to that information can buy ahead of other buy orders, say from retail traders, and sell ahead of sell-order avalanches.
Just imagine for a second what you could do with that information.
"Deep book" data and the uncontested ability to instantly act on that data are arguably some of Wall Street's toughest, most effective advantages over retail investors. This SEC rule change would essentially cut into that advantage, blunting one of Wall Street's edges. That, in turn, could impact how intermediary high-frequency shops, order flow buyers, and market-makers trade, what kind of liquidity they provide, and what they pay brokerages.
As part of the wider war over equal market access and a level playing field, it's tough to overstate how important this change could be for regular investors. (Just as important, potentially, as what could be a $353 billion tidal wave of capital – more on that here.)
If you run a hedge fund or a stock exchange, the takeaway is clear: You're on notice.
For the rest of us, I think the most important takeaway from all this isn't necessarily the most obvious. Clearly, equal access to this kind of data would empower regular, retail investors and traders; it would undoubtedly help with better, more profitable outcomes.
But more than that, I think it really reinforces what I've said all along: We have to be in the market.
We're living through a bull market for the history books; the S&P 500 alone has come up more than 75% since the March 2020 lows. It's surely no coincidence that this is happening at a time when technology, particularly mobile investing apps, and the ability to easily buy fractional shares have made wealth-building easier and more democratic than ever before.
Get into the market and own the market-driving stocks like Amazon.com Inc. (NASDAQ: AMZN) and Tesla Inc. (NASDAQ: TSLA), just to name a few. Own as much or as little as you can; buy fractional shares if you need to, but buy shares. You've got to be in it to win it.
We've barely scratched the surface of the profit opportunities out there, and this rule change could help deliver some truly staggering winners.
As good as it's been, so far, and it's been great, I think it could be about to get even better.
More directly, retail traders and investors would benefit by seeing into the book for stocks, and new trading products and services would flood the market, greatly leveling the playing field for mom-and-pop investors and small traders and investors just getting their feet wet in the wild world of securities markets.
As for bigger and better things ahead, my latest prediction is just a case in point; it's really big, and really bold. I'm projecting a $353 billion "tsunami" of capital could be headed toward five very specific companies. I've simply never seen money moving at this volume and at this pace before. It's the kind of "hyperdrive" event that could offer well-positioned folks a once-in-a-lifetime buying opportunity. You can watch more about that right here.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.