Market structure should be REQUIRED learning for every serious investor. Market structure changes are responsible for nearly every major market crash in history, and have made fortunes for the companies & investors who can predict these changes in advance. A thread:
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Market structure is defined as Wall Street's plumbing network. The rules that govern Tesla's inclusion in the S&P 500, the rejection of a Bitcoin ETF, and the launch of water futures are examples. If the market is a computer, market structure is that computer's operating system.
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The 1987 crash was caused by changes in market structure: the rise of portfolio insurance. When too many investors used portfolio insurance & sold stocks AND index futures at the same time, it resulted in the Dow dropping 23% in one day.pic.twitter.com/b4JtPOuc96
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The 2008 financial crisis was caused by changes in market structure: an increase in subprime mortgage lending combined with inaccurate credit ratings. When the structure failed, a few funds changed market structure (via credit default swaps) to make fortunes during the crisis.
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The 2010 Flash Crash was caused by changes in market structure: low e-mini S&P liquidity combined with the rise of high frequency trading. When a large S&P futures sell order hit the tape, HFT arbitrage caused markets to drop 10% in the span of a few minutes. Sound ON:pic.twitter.com/P5iZiAZwDv
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Market structure can crash the market, but it can BEAT the market too. Electronic trading - arguably the biggest market structure shift in a generation - has made innovative exchanges multi-billion dollar enterprises in the process. Bond platform MarketAxess as an example:pic.twitter.com/XSOLlJR1fH
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Even the rise of Robinhood is a market structure issue. When Robinhood realized market makers could pay them more than their account holders, they went commission free and unleashed a tidal wave of retail trading on the market.
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If market structure is so important, why don’t more people care? People care about things they can see. Investors talk about GE and Kroger and Disney because they can SEE microwaves and groceries and the Mandalorian. It's harder to visualize a financial operating system.
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I have a passion for understanding & writing about market structure. If you're interested in learning about today's market structure issues with me, consider signing up to my Friday newsletter:https://frontmonth.substack.com/
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