Time to Abolish The Equity Market “Chop Block”
The National Football League is a big business that raked in over $13 billion last season. But rather than sitting back and just collecting revenue, the NFL is constantly trying new things to make the league better like creating their own television network and playing some of their games overseas. The owners of the league also know that some of their rules need to occasionally be changed to benefit the game. Yesterday, the NFL owners eliminated the “chop block” – a dangerous move that was causing potentially serious injuries in the league. According to NFL.com:
“In a move that will cause sweeping changes to NFL offensive strategy for the 2016 season and beyond, owners decided Tuesday at the NFL Annual Meeting to abolish any and all “chop” style blocks.
It was a move met with immediate and resounding praise from defensive players tired of getting their legs cut out from underneath them. Offensive lineman, however, were less than enthused as the block was still legal in certain situations. Over the last few years, various changes to the rules have limited the scope on how players could use the technique. It was a valuable tool for offensive linemen coming from the weak side and could even out some speed discrepancies. However, the speed and target area of the blocks could lead to serious injury.”
The owners had tried to tweak the rules surrounding the chop block in previous years but finally decided that, for the good of the game, the chop block had to be banned. No doubt there will be some players who will be upset with this rule change and there will be some players who are very happy. The point is that the NFL decided that they needed to change a rule so they could prevent injuries.
We think the SEC could learn a lesson or two from the NFL. Rather than wait for the market to get into the fragmented and broken state that it is in right now, the SEC should have been making some rule changes over the past few years to eliminate behavior which was harming long term investors. Sure, they added some rules like clearly erroneous trades and limit-up/down circuit breakers, but these rules didn’t actually address the cause of the problem.
While this has been frustrating for long term investors, we think the SEC has finally gotten the hint (due to many of us expressing our outrage) and is finally set to embark on some rule changes which will attempt to level the playing field. The tick size pilot and the potential maker/taker elimination pilot are two good examples of some changes that should help long term investors. We are also getting the strong sense that the SEC wants to give some leeway of its interpretation of the trade through rule (known as Rule 611). As we noted earlier in the week, the SEC issued an interpretation of automated quotations, where they talked about a “de minimis” time frame for protected quotes. This interpretation should help IEX get approved with its speed bump intact:
Technology has changed the stock market game but the rules have remained the same. The SEC has finally realized this and is starting to adjust the rules to prevent the harmful “chop blocks” that the high speed crowd has been giving to the long term investor for the past few years. While the anti-IEX crowd may scream and complain that the SEC is not following their own rules if they approve IEX with the 350 microsecond speed bump, we would argue that for the good of the market the SEC is doing the right thing.