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Opinion
Matt Levine

Why Exchanges Like Speed Bumps

Also Overstock, Carlyle and Pocketful of Quarters

Corrected

Programming note: Money Stuff will be off again tomorrow, back on Monday.

The paradox at the heart of market structure is that “Standing Limit Orders Are Trading Options That Offer Liquidity.”  If a stock is trading at $100, and I place an order to buy it at $99.99, that order goes onto the order book, and I am bound by it. I have effectively written a put option on the stock. If the value of the stock goes down to $99.95 before I cancel my order, the put will be exercised against me: Someone will hit my bid, and I will be forced to buy the stock at $99.99. If the value of the stock goes up to $100.05 the put will not be exercised, and I will not get any stock. My risk is asymmetric: I buy the stock when it’s going down, but I don’t buy it when it’s going up, just like with a regular put option.