Basically imagine you want to buy apples from 3 different fruit stands in different parts of a city.
Fruit stand 1 is the cheapest, fruit stand 2 is the 2nd cheapest, and fruit stand 3 is the third cheapest.
You want to buy all the apples out there.
The rule is that you have to go to the cheapest fruit stand first, and exhaust their supply before moving onto the next cheapest fruit stand. If you want to go to ALL the fruit stands at the same time you need to tell them you are an 'OK' guy and are really buying fruit everywhere.
Well, someone deleted code and ignored one of the fruit stands. This violated a rule and cost the fruit buyer a lot of money in penalties.
If I ask my broker to buy some stock, I want it at the lowest price. My broker, left to his own devices, may prefer to buy at a higher price because it is more profitable for him.
This rule seems designed to protect the consumer when the consumer and the stock brokers goals are not aligned.
The article says they only do proprietary trading, which I thought means they only use their own money. I guess that's rare enough that the rules apply regardless in order to simplify things?
The rules apply to the whole system -- notably exchanges, the exchange "members", and broker-dealers. Latour is a broker-dealer (BD) and thus have to play by the rules, even if they don't have customers.
If they weren't a BD, their BD (which is required to ultimately reach the markets) would be on the hook for letting this happen. ISOs are something that get a lot of compliance/regulatory scrutiny and most BDs don't let their customers use them. If they are allowed, there's a lot of reporting/transparency/surveillance to ensure they are issued properly. And as you can see from this fine, there are a lot of rules and corner cases one must cover and apparently even the best firms mess it up one way or another.
Latour's previous fine (read Matt Levine's continually excellent articles about this stuff) was for "Net Capital Requirements" which are designed to keep customer money safe, particularly in the presence of other customers who might blow up ... of course Latour has no customers, but it is still the rules. [Although IMO this one was a grey area where Latour probably had better models than what the rules required, but since they didn't match the rules properly they got fined.]
The person offering the cheaper price is hurt, because someone offering a worse price is getting filled before him. Essentially, the moral argument of Reg NMS is to enforce price-time priority in a distributed system. Whether it actually accomplishes that is...well, I'll leave that up to you to decide.
It enforces price priority, not price-time priority. Exchanges can use pro-rata, etc. at the same price level; and if multiple exchanges offer the same price level, a BD is free to choose any of those to route to.
These rules apply when you are trading with money that is not yours - as a fund manager, hedge fund trader, broker etc.
Intermediaries make up 99.9% of the market because very few individuals would bother paying to connect to a dozen stock exchanges if the can pay a broker a few bucks to do their trade instead.
And relatedly, what is the point in the existence of multiple markets, if not that you can choose which market to trade on for your own technical–logistic reasons?
You can, but only at the same price. It's a weird system, especially when markets are located different places, so from each trader or exchange's vantage point, things are in different states. Working around this friction led to an explosion of special order types that some people argue are unfair or overly complex.
In Europe and Asia, there are competitive exchanges, but no rule to force people to route there. There are some guidelines for brokers with customer orders to have a duty of "best execution", but for proprietary traders or professionals, they can do whatever they feel is ideal.
And guess what, there are very few "trade throughs" or cases where markets invert with each other despite lacking such a rule. People usually act in their economic best interest without a law mandating they do so. If it happens, it's an arbitrage that someone will eliminate very quickly.
