David Copperfield

The days are getting shorter. We’ve passed the longest one of 2017, Summer Solstice. Imperceptibly now the sun will move off its zenith.

Karen and I marked it here in Minneapolis before the NYSE’s Rich Barry and I talk market structure for the Edison Electric Institute’s investor-relations meeting today at the offices of host Xcel Energy downtown.

Last night in lovely and mild Minnesota at Café Lurcat off Loring Park south of central city, a group of us IR people were talking about measuring IR outcomes today.

“You track your owners in 13fs,” said one utility IR professional. “And you correlate your meetings with them, and we saw this one four times and their holdings went down, and this one over here not at all and they doubled positions.”

The problem isn’t IR.  It’s what’s being measured, and how it’s tracked.

Okay, we could go one step further.  If public companies were half as engaged in monitoring the market as the exchanges and high-frequency traders that have profited enormously from its opacity, we’d persuade officials to improve rules.

In fact, I’ve been invited to submit testimony for a congressional hearing next week on problems with financial markets such as the startling absence of companies from all rulemaking processes. Yes, congressional staffers see it just like we do.

I intend to articulate in the starkest terms how issuers are misled about the nature of their trading.  There’s no excuse for it. It continues because issuers are, paraphrasing that country song, treated like mushrooms. Google that.

Realistically, changing the rules takes time. What can we do right now?  You can know why intensive effort to track outreach and correlate it to ownership-change renders lousy results. What you’re measuring doesn’t reflect how markets work.

First, 13f ownership data is an act of Congress – from 1975. Forty-two years later everything has changed but the data used to measure ownership.  We had circular-dial phones then. Today your phone will talk to you.

Yet the 13f lives on (it’s Section 13f of the Securities Exchange Act, legislation expressly prohibiting discrimination against issuers). The measure was designed for a market where investors bought companies. Today 85% of trading volume daily comes from purposes and machines seeing stocks as products not stories.  About 48% of volume is borrowed every day – which doesn’t show up in ownership data.

Many hedge funds don’t have to report holdings because managed assets fall outside regulatory minimums. Exchange Traded Funds (ETFs) are posting assets daily while settlement data follows four days later – and 13fs post positions 45 days after the end of the quarter.  Half of daily volume has an investment horizon of a day or less.

About 13% of daily trading ties to derivatives, which don’t manifest in 13Fs. To wit, markets surged Monday and pundits declared it a return of enthusiasm for economic outcomes. The data showed a 17% increase in Fast Trading – an investment horizon of a day or less – drove Monday’s gains.

Machines were inflating equities to reprice the new series of options and futures trading Monday.  Yesterday counterparties were selling assets to cover short-term trading losses.

None of that is investment.  Much is sleight of hand. So is data that lacks answers.

What’s more, much trumps story. Interest rates, relative currency values, economic expectations and geopolitics, political elections and housing starts, central-bank actions and inflation and policy speeches, and blah, blah blah.

So what do you do?  First, start measuring the right data.  Ownership information cannot tell you what sets price.  Stop expecting miracles from your surveillance provider.  They’re great professionals but the rules around data make it a functional impossibility for you to find what you’re looking for in that data set.

Second, stop looking backward. Instead, do two things well from a messaging view.  Tell your story to a diverse palette of institutional relationships. Have a good follow-up plan.

Make these ideas science – matching product to consumer – and you’re helping the buyside find opportunities and the buyside in turn is helping you achieve the IR goal: A fairly valued stock and a well-informed market.

We have that science. We know every day what part of your volume is driven by passive investment and active investment. If you want help understanding the market, ask us. We do one thing well. Market structure.

Summarizing: Are the measures you’re using to benchmark your IR efforts a reflection of contemporary financial markets? If not, why not?

And why is your exchange, which makes money from rapid-fire trading, focusing your attention on shareholdings 45 days after quarter-end?  Feels like David Copperfield. Resist the illusion. You can and should have better information. Demand it.