So one thing I wanted to talk about concerning exchanges is that a peculiar practice called payment for order flow. So here is what happens. When you decide you want to buy and sell stocks, you get a brokerage account. So it could be with an individual broker who works for a local brokerage firm that deals with you, the public. Some guy you can call up and talk to. Or it could be a discount brokerage firm, like when you're working online. But when you place an order you tell your broker I want to buy or sell shares, how does he or she make that happen? Well, normally your broker could transfer the order to a stock exchange. Then that person at that group could execute the order, in other words, find a counter party who, if you want to buy, who will sell. But often they don't just hand it to someone. There's someone who will pay them to get your order. And of course, who is ultimately suffering from that, it's you. Because that payment costs money. And so people thought that was suspicious, why doesn't the brokers give my order? Isn't it his or her obligation to give my order to the best executor? Maybe I'm not getting the best price. And so in the year 2000 the Securities and Exchange Commissions investigated this practice of payment for order flow and wrote up a big report which you can find on the web. They were thinking of outlawing it. It sounds like it's something that should be outlawed, right? When I go to my broker why would my broker be collecting money by sending my order to someone who might do a bad job of getting me a good price? But the SEC decided not to outlaw it, and the practice continues til today, controversial still. The reason they didn't is complicated. These people are all playing games of one sort or another, and it would just change the nature of the game, it's puzzling to figure out what will happen. One thing is that they often send your order to a millisecond trader, someone who does really rapid trades. And wants to see the order first, okay, goes to this guy first. And that can have an advantage. So but the SEC decided, one thing is they were thinking, I believe that if you outlawed payment for order flow, it might contribute to monopoly power on exchanges. And they wanted to see competition among exchanges or they thought it might affect the kinds of bids and ask that dealers are posting when they know that there's payment order flow and it's affecting millisecond trading they might post less narrow bid express. So they decided it was just too complex to figure out the consequences of outline so they decided that payment for order flow has to be disclosed. So your broker has to put somewhere on the brokerage BD website that they're doing this and he must report statistics on what they're paying. And on the order execution quality, this is something that most people don't think about but do they really get you the best price? You see a broker has to do a lot of thing, someone who's trading on the exchange on your behalf has to do a lot of things. For example if it's a big order they should break it up into little orders, right? And not affect the price by dumping it all on at once. Or they might want to deal with upstairs traders at the exchange. The so-called upstairs traders are not on the floor, but they make big deals and negotiate. So it's a difficult thing to regulate and anyway, it still exists. We have payment for order flow despite controversy. I think I mentioned before, but let me say, there are different kinds of orders. Most people place, especially retail clients, place market orders. So you just call your broker or you go to your online brokerage and say I want to buy 100 shares, that's it. That's all you say. Then they go in and they fill that, we hope, the best possible price. The nice thing about a market order is you know that it will be completed. But you can also place a limit order to buy or sell. And the limit order is an offer. Let's say it's a buy. I want to buy the stock, but the price has to be below some number, which I'll give. Or I want to sell the stock, and the price has to be above some number, which I'll give. So why would I do that? Well, I'm worried that the price might rapidly change on the market. I can see what it is now by looking on online sources, but I don't know that it will actually be there when I execute. Sometimes the market has a big glitch, or you might come in at a time when somebody else is selling a lot. And in order to get a price for you right now, it might be a really low price. So we had something called the flash crash a few years ago when the stock market In the United States dropped tremendously in a matter of minutes. And a lot of people who place market orders said I'll never do that again. It'll only be limit orders. A stop loss order is the same thing as a limit order, except it involves you naming a price as well as offering to buy or sell but it's different. With a limit order, you say I want to sell at any price at or above the price given. But with the stop loss order, it's I will sell at any price at or below the price I've quote. So why do I do that? Well, I quote a price, let me see, what is it, let me tell if it's buy or sell. Usually a stop loss order I think is an order to sell and you want to say, I want the broker to sell if the stock price falls below a certain amount. Presumably, I own the stock. I don't want to lose too much. It's like we're having a put option that we talked about before. I wanted to get out if the price falls below a certain point.
