Sure, you might not be so worried about the stock market rout now that stocks are climbing, but that doesn’t mean things aren’t serious.
The New York Stock Exchange thought so this morning — it invoked something called “Rule 48,” a measure designed to smooth trading and dampen volatility. The rule means market makers won’t have to, as Dow Jones’ Kristina Peterson says, broadcast price indications before the bell, making it easier and faster to open stocks.
You might be wondering now what “market makers” are, which means you probably thought that markets worked on their own, without anyone’s help. Well, I have news for you, my friend – they don’t.
Here is a short video explaining what they do:
Markets need fine-tuning, just like us, and market makers are the greasy monkeys of American stock exchanges: they place the oil in the market machine. When you show up at the market to buy something exotic, they are there to sell you. When you run to try and unload a plummeting junk stock, they will buy it. Market makers provide liquidity, i.e. the ability to trade easily and with as little friction as possible.
So where does Rule 48 come from? To extend the oil metaphor a little further, a smart mechanic always adds oil before starting the engine. So, market makers usually tell everyone what they think stocks are worth before the trading day begins. That way no one starts the day fumbling around, wasting time, trying to figure out how much to pay or get paid. Liquidity, remember?
But on a day like today, this pre-opening and price-setting activity would have slowed the market. Why? Because global markets were hammered and there wasn’t much clarity on when stocks would open. Market makers risked fixing a price for a stock and then finding that the stock was trading much lower elsewhere. It would have just made the liquidity problem worse, because everyone would have to slow down and figure out who was right, the market maker quoting you $60 a share or the guy on the phone quoting you $55.
By invoking rule 48, the NYSE wanted to deviate from the market. And he does it quite often. Zerohedge notes that it did in January 2015 (during the blizzard), June 2012 (amid a dramatic drop in pre-open futures) and September 2011 amid the chaotic 400 point swings in the Dow Jones Industrial Average.
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