An insider’s guide to the US stock market

I keep dreading that moment when someone I’ve just met innocently asks me: “so what do you do?” It’s hard to have a good elevator pitch for an “unconflicted, modern, and nimble US equities broker-dealer for institutional customers.” I start to stumble through an explanation, and once people get the general gist that it has to do with stock trading, they typically jump to asking if I have any advice on what stocks to buy.

“No,” I explain lamely. “We don’t think about what stocks to buy. We think about how to buy stocks.”

At this point, some people get confused. “What do you mean, how to buy? Don’t you just go to the stock exchange and buy them?”

And then I start down the rabbit hole of explaining that there are actually 13 stock exchanges, and about 30 so-called “dark pools,” all of them competing for the privilege of matching buyers with sellers in any given stock.

This is where people who already have a minimal level of interest in stocks become more confused than people who have none. “But I thought each stock was listed on a particular exchange,” they rightly protest.

“That’s true,” I say. “The listing exchange officially opens and closes the trading in that stock each day through the opening and closing auctions. But at all other times, the stock is traded all over the place.”

“I guess that’s good,” they sometimes say. “Competition.”

“Yes,” I say. “It is good. And it also has many undesirable effects.”

How very American.

“So,” they ask me, “your company decides where people should buy stock?”

“Kind of,” I say. “We take orders from clients and then go out into the market and buy or sell on their behalf. But where is only part of it — a very important part of it is when. Prices can change across all of the places very quickly in time, and it’s a challenge to navigate that well.”

“Interesting,” they say. “Can I hire you to trade stocks for me?”

“Not unless you are a mutual fund, hedge fund, pension fund, etc.,” I say. “And if you’re not, you’re probably worse off trying to trade individual stocks by yourself. Unless you have a very specific reason to own a particular stock, you should be investing in something like an index fund instead.”

At this point, people often regret their decision to talk to me in the first place.

There is a temptation here to give into the ethos of specialization: to throw up our hands and say “Oh well, the stock market is just too complicated to explain to people at dinner parties. We should leave it to the experts.” But the US equities market is the largest in the world — it is a beating heart that pumps capital through the arteries of our economy, and its health and operation affects us all. We feel this in moments of crises — when the market crashes, when it roils in response to world events, or when it scarily skids for no apparent reason at all. But in the calmer moments, we might turn a blind eye to small creaks and inequities in its clunky operation that slowly siphon lifeblood away from the parts of economy that more sorely need it.

In between crises, when we have time for careful research and reasoning, where is our curiosity? Don’t we want to know how the US stock market works? Shouldn’t we demand to know how it works, and whose interests its various features serve? When non-experts try to figure it out on their own, and quickly drown in a sea of off-putting jargon and circular logic, should we accept that as a sad, but inevitable state of affairs?

No! The stock market may be complex, but it can and should be explained in more accessible ways. Perhaps not inside the confines of a dinner party, but surely in less than the amount of time we might spend binging a season on Netflix.

In this spirit, we’d like to show you something we’ve been working on at Proof: a market structure primer. We started it as an internal document for on-boarding employees who might not come from a finance background, but we quickly decided it was worth fleshing out into a public-facing work. It is intended to be a living document: we’ll keep adding to it and revising it as we have time, and as we learn new things about market structure. At this point, it may already contain more than you ever wanted to know about the mechanics of the US stock market. If not, let us know what we’re missing!