Build a better mousetrap, and the world will beat a path to your door.  This isn’t just a figure of speech; the U.S. Patent Office has issued thousands of patents for mousetraps, more than any other machine.  The truth is building a better mousetrap is emblematic of American ingenuity.

Is anyone looking to build a better exchange for investors?  Perhaps so.

Researchers have devised a design for a financial exchange that increases fairness and transparency while lowering costs.  The general concept: investors- ranging from large institutional traders to a first-time individual investor- could easily trade a customized portfolio or index by simply loading tickers into a portfolio order and then assigning a weight to each position.  The idea is called Flow Trading, and it would be the basis of a new type of exchange.

The Flow Trading concept has three main components:

  • Portfolio Order– Buy/Sell multiple stocks in a single directive called a ‘portfolio order,’ which would execute in seamless trading units as small as nano-shares (billionths of a share) and micro-dollars (millionths of a dollar)
  • Frequent Batch Auctions– All buy/sell orders are collected over a defined time period and then executed together at a single price when the maximum number of orders can be executed.  Batch auctions could be held at a set frequency, such as every second of the trading day for every listed security.
  • Speed Control– A more refined order system allowing for varying trading unit transactions based on a limit defined in the portfolio order

The overall focus becomes the portfolio or index instead of an individual security.

A note on Frequent Batch Auctions… batch auctions would level the advantages that high-frequency trading (HFT) firms enjoy.  HFTs invest heavily in auto-trading technology and place their servers as close as possible to the order-matching engines of the exchanges to beat everyone else to the trade when an order is placed.  In a batch auction exchange, all buy/sell orders are collected over a defined period of time and then executed together at a single price when the maximum number of orders can be executed.

Of course, the whole idea is mainly academic- and needs further research.  The fee structure of the existing exchanges and institutional money managers may not lead to a big push to dramatically change the system.  Though, as you’ll read in the full Chicago Booth report on the Flow Trading concept I’ve included below, SEC Chair Gary Gensler was quoted in December 2022 that “Today’s markets are not as fair and competitive as possible for individual investors—everyday retail investors”; well said!

The concept of Flow Trading is worthy of discussion.  What are your thoughts on Flow Trading or the components that bring it together?  Reach out to me here and let me know what you think!

~ Brian Kasal- The Leadership Matrix

Click Here- Chicago Booth Review- A Blueprint for a Better Stock Exchange

P.S.- Did you see my last Leadership Matrix post?  To Regulate or Not To Regulate… That is the Question for Big Tech

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