Sunday, Karen and I loaded the bikes and set out with good friend Jeffrey to conquer the passage between two of Colorado’s tall “fourteeners” named Princeton and Harvard. We rode from the Arkansas Valley floor at 8,000 feet up Cottonwood Pass (which sounds like “cotton whupass”) from Buena Vista to the summit at 12,126 feet and a stunning view of the fruited plain.

Choosing a route from point A to point B had me thinking about stock trades (you do this long enough, that’ll happen to you too). Stock trades must have routes. Sometimes it happens automatically. Whether orders for shares in your stock meet their matches internally at Barclays or by dint of timing, routing, pricing and chance at Susquehanna’s dark pool, RiverCross, often is a matter of routing. Even online brokers afford ways to route trades now.

Most IR folks don’t think about routing. People buy and sell, and that’s that, we suppose. Alas, no. Routing plays a big role in the behavior of your volume. Think about driving across town in a large city. You might take the freeway or you could wander the surface streets. One may get you from point to point faster even if it’s farther, while with the other you’ll see more and maybe check off errands but hit lights.

The same applies to trades. Brokers must report how they route orders (called Rule 606). Routing decisions can change the entire nature of the volume, too. Sometimes it’s how arbitrage occurs – sending orders out on the freeway and on surface streets simultaneously to see how they impact other traffic patterns.

Orders have value too. It’s not just the buying and selling, but the act of buying and selling. Liquidity as commodity is valuable to others. Exchanges pay for it, offering the best incentives to brokers bringing them the most liquidity. Payments are called “rebates.” You can also pay more to get your orders first in line, just like at Disneyland paying extra for a FastPass slots you ahead of the line. Those are routing decisions.

Broker dealers pay for volume too, called Payment for Order Flow. If they aggregate enough volume and send it out to exchanges as what are called “non-marketable orders,” or orders outside prevailing best prices, then that liquidity can earn big payments from exchanges. The exchanges collectively pay about half their gross annual revenues in these “maker” rebates. It’s about routing.

So it’s not just that institutions buy and sell stocks. In today’s markets, decisions about how orders are routed can become investment schemes themselves. Algorithms may route loose, non-marketable volume around throughout the day just to see what it generates in rebates and payment for order flow.

If a trade routes to a broker, who matches the trade internally inside the best prevailing bid or offer, and then that volume starts routing about to generate the sellside firm returns on liquidity, and your price moves as a result, is that rational activity?

No. Rational thought did not change the price; trading activity did. And that’s why Rational Price, our measure of thoughtful investment pricing, is an important distinction from the noise of the market.

Before we answer, we enjoyed New Orleans last week, despite humidity that had us struggling to distinguish the surrounding atmosphere from Lake Pontchartrain.

The NIRI Southwest Regional Conference concluded with brisk canvassing of key issues, wrapping on “would you choose an IR career again?” (Unanimous yes from panelists)

Bourbon Street hopped as usual, tourists with beer in cups labeled “giant donkey,” in so many words. We heard from the bartender at Pierre Maspero’s that the Lower 9th Ward and Chalmette still aren’t the same, folks picking up and moving across the lake to Covington. Many for-sale signs in the Quarter. We strolled by Brad and Angelina’s, who’ve done their part and taken one sign down. They didn’t look to be home.

So here’s your New Orleans Analogy about market structure. When the levees broke, water spread out, and equalized. The law of diffusion spreads molecules to fill available space. Physics. There are spreads, and there are spreads. Imagine how handy it would have been if at the spots where levees ruptured, the water just stayed in place, a sort of Moses effect. Alas.

The Game column in today’s Wall Street Journal by Dennis Berman notes how Senator Ted Kaufman thinks the SEC should revisit whether narrow spreads help investors. Good article, we recommend it. It brings us to our opening question. Often, a percentage of our client base moves in intraday aggregate by more than 5%. Size doesn’t matter. I can think of a client who reported a couple weeks ago and missed expectations widely that’s up 18% from after the call. Another client in the same timeframe beat, and is down 19%.

How? Did the minds of investors radically shift in days, such that intrinsic value, without one update to a metric, has shrunk or inflated by factors? What accounts for monumental value gaps from minute market spreads?

At the thought of what answer may come, you may grope for your monolithic moke of a brew (labeled otherwise in the Quarter) to gulp some down. Relax. No complicated constructs here. The answer is simple: by controlling both prices and volatility at the point of entry through the national best bid or offer and penny pricing increments, we create giant pricing wrinkles that move not according to fundamentals – fundamentals don’t set entry and exit points – but according to the levees.

Put another way, if the levees direct the flood away from equities to, say, US Treasuries, then all the business acumen on the planet will not keep your price frozen there at your rational price, Moses at the Red Sea, while the waters rush on.

You will be re-priced by everything else in the market. Is that fair? According to current rules, it is. We’re improving competition, so say those crafting them. If you like that, then be prepared to suffer market slings and arrows in spite of fine fortune.

Something to consider diffusing into that letter we suggested last week you pen for your C-suite on market structure: why not a test market that does the opposite of what we’re doing? No intermediaries. If you buy it, you own it. No price controls. You may bid or offer what you wish, and if someone agrees, more power to the both of you. No circuit breakers – let caveat emptor do its cleansing thing when or if it must. Voluntary membership by public companies, who get to offer a set number of shares there.

Why not? The levees didn’t work in New Orleans and constricting prices and behavior isn’t working in the markets. Sure, it might take the spirit of Andrew Jackson from 1812 in the Big Easy. But that worked out pretty well.

The NYSE and Charles Schumer were talking today about rules for dark pools. The NYSE is partnered with dark-pool operator Liquidnet and is building a massive high-speed trading facility in New Jersey. The Nasdaq meanwhile plans to launch an exchange next year that will give priority to orders of size, to compete with the size advantage dark-pool operators offer.

What’s going on here? Politics, mostly. We’ve said plenty about this stuff. But the regulators – and IR folks too we fear – continue to misunderstand the central issue. The IR profession is about supporting capital formation and fostering productive, creative enterprises. At the rate we’re going, none of us will have jobs. If trading things is an end unto itself, why bother with all that work to start and run companies? Take your idea to a broker, have them issue an exchanged traded note representing your idea, hire an accounting firm to handle regulatory and financial reporting, and that’s all you need. Traders, have fun!

We’re being obtuse. But dark pools are like black markets. Black markets form in response to price controls. We can go back to the order-handling rule in 1996 in which the SEC set out to “create better pricing opportunity.”

Come forward to Reg NMS. It was a legitimate effort to minimize market arbitrage, but it in effect is a gigantic price control. It says that all trades (there are exceptions but stay with us here) must execute at the best national bid or offer. That’s like pouring Niagara Falls through a funnel. You have literally millions of different prices trying to match up for securities, but trades can only execute, simplistically, at that one best price. That supposes that all buyers and sellers have only one thing in mind: price. If that were the case with cars, we’d all drive Tata Nanos.

Dark pools formed to serve audiences that wanted something more than the best price at this split second in time without regard to supply. Who uses them? Mostly big institutions wanting to move sizeable amounts of shares without interference by parties with other objectives such as speculation, rebate-capture, high-frequency trading and risk-management.

What’s the response from regulators? To clamp down on dark pools.

We’re oversimplifying. And we have good friends running high-frequency trading platforms. We mean no offense to anyone. But the problem in our equity markets is that they’re efficient for parties that want the best price and which don’t want to commit capital and own things.

But they’re very inefficient for capital formation. In 1996, 675 companies IPO’d in US markets with prices over $5. In 2008, 21 such companies debuted here. Money has shifted to private equity by the trillions, and to international markets with fewer price controls.

This had better matter to us more than anyone else. This is our profession. Let’s defend it, rather than slice our collective noses off to spite our faces.