What do you get paid to do?
That’s the question the SEC may soon pose to high-frequency traders, according to a story from Bloomberg yesterday.
“The maker-taker compensation model is very much in the core of what our market structure review folks are looking at,” said SEC Chair Mary Jo White.
If you’re the CFO or investor-relations officer for a public company, you should want an answer too. Because there’s belief silence from public companies about market structure indicates agreement.
Suppose I said, “In one minute, describe your business, its key drivers and how you differentiate yourself for investors.” I bet most of you could.
What if I asked, “How do your shares trade and where, who trades them, and how are they priced?”
“I don’t even know what ‘maker-taker’ means,” you might mumble.
It’s convention in IR to ignore the stock but that ethos has led a generation of investor-relations professionals to think they don’t need to know how the stock market functions.
“I don’t want my executives watching the stock,” you say. “If we run a good business, the rest will take care of itself.”
The largest institutional investors in the US equity market, Blackrock and Vanguard, are asset allocators. They’re not Benjamin Graham, the intelligent investor. They track benchmarks because that’s what they’re paid to do.
Active investors are paid to find good businesses, deals, and yet nearly 90% don’t outperform indexes. Stock-pickers are not less intelligent than mathematical models. But they seek outliers in a market that rewards conformity.
Follow me, here. The biggest investors use models, sending trades through the biggest brokers, which are required to meet “best-execution standards,” a wonky way to say “give investors good results,” which is determined by performance-averages across the market – which are being driven by the biggest investors and their brokers.
Thus Blackrock and Vanguard and their brokers perpetuate standards of conformity created by regulators. Company story becomes secondary to indexes and Exchange-Traded Funds, investment vehicles dependent on conformity. (more…)