Follow the Line

Money is better than poverty, if only for financial reasons.

So wrote Woody Allen for himself as Broadway Danny Rose in the eponymous 1984 film. I’m not sure what Allen meant then as I was a high-school sophomore wearing a mini-mullet. But there’s an application to IR.

Last week I had an intense exchange with an investor-relations officer new to the chair and moved over from the sellside after losing his job in research to advancing asset-allocation investment (This is Blackrock to Betterment, the translation of business strategies into squares on a Rubik’s Cube. These investors buy no research with commissions and listen to no earnings calls but track governance, meaning the biggest investors now are tuned more to rhetorical position than financial condition – I leave risk/reward ramifications to you).

Cognitive dissonance by definition is an inherent contradiction between evidence and conclusion. In Steamboat Springs it’s easy to match evidence to conclusion when watching the weather. If storms approaching from the south cross over Catamount Lake, you’re going to get showers on Mount Werner, the ski hill. Simple. No cognitive dissonance. You can see what’s happening.

But it struck me listening to this new IRO that he’d not drawn a line between his emigration from brokerage to corporate belfry. It reminded me of that lyric by Jacob Dylan, son of Bob and troubadour with the Wallflowers, who refrained plaintively how the same black line that was drawn on you was drawn on me and has drawn me in. Despite the origin of his demise on Wall Street, this IRO was certain active investors were pricing his shares. “Indexers don’t set prices,” he insisted. “They track active money.”

This view defies what we just saw from the NYSE where his shares are listed. When the exchange stopped trading for nearly half the day July 8, it was to make sure the closing cross – the ending auction setting prices for indexes and ETFs – would go off properly. The world’s greatest equity market sacrificed most of the trading day to one chronological exigency. And that’s because the most vital endeavor is tracking benchmarks – pegging the index. Getting the data right.

Follow the drawn line between diminishing sellside influence and the shift of equity research analysts to the IR chair and how the market functions. It’s drawn us all in to a 6th Avenue Heartache in a way, because what moved markets before doesn’t now, and if you suppose so, I refer you back to the definition of cognitive dissonance.

But it’s not sad! It just changes IR Best Practices – things we should all be doing. Our profession’s requisites must include comprehension of how prices are set so that the information you provide to management is accurate. Five rules:

Number One, high-frequency trading is a product of incentives paid by exchanges to fast traders to create valuable pricing data that exchanges can sell back to brokers. This is the No. 1 price-setting force (only half of intermediation is fast trading; the rest is from brokers working orders for customers).

Number Two, the buyside and sellside have spent billions over the past decade to disguise whether they’re buying or selling, so translating “block trades” into “long-only investing” doesn’t follow the money.

Number Three, the greatest force in the equity universe today is not love but asset-allocation. Blackrock and Vanguard. And they do price your shares routinely.

Number Four, more than 50% of your volume is the middle men (fast traders, brokers disguising orders) not actual investment. Factor that into your thinking.

And Number Five, there is little to no “long only” money anymore. Everybody uses a smartphone, and everybody hedges. Derivatives are a colossal factor because they represent risk-transfer and leverage and often (as yesterday in equities) price the underlying asset.

Connect the dots. Follow the money. Think. Okay, so money is no elixir and as Woody Allen said, it may be superior to poverty for financial reasons only (smile). But in the IR chair (and in politics) you should always follow it, because it’s the line of truth.

Behavioral Volatility

I recall knowing one particularly volatile fellow. I should have called him VIX.

Speaking of the VIX, options on that popularly titled Fear Gauge expire today as a raft of S&P components report results. Many will see sharp moves in share-prices and attempt to put them in rational context.

Volatility derivatives are no sideshow but a mainstream fact. Yesterday the top five  most active ETFs included the SPDR S&P 500 ETF (SPY) a Standard & Poor’s Depositary Receipt from State Street that traded 68 million shares, more than any single stock including Apple ahead of results, and the VIX Short-Term Futures ETN iPath (VXX), with 38 million shares, matching Facebook’s volume (out-trading all but seven stocks).

Louis Navellier turned the concept of volatility into quantitative analytics for investment at his Reno advisory firm managing $2.5 billion. Oversimplifying, rising volatility signals change. Mr. Navellier used increasing volatility as a signal to sell highs and buy lows.

By the same token, when your shares break through moving averages, it’s at root a volatility signal. Your price is changing more than the historical central tendency.  But what causes volatility?

This is why we introduced Market Structure Alerts in June for our clients. They’re predicated on the seminal principle that volatility signals change. Rising standard deviation is a pennant pointing to developments you should know. But we want more than surface answers.  Measuring tides alone offers no reasons. So we measure behavioral volatility, not price or volume volatility – which is a byproduct of the former.

When the ocean rolls or roars, we understand that it reflects something else ranging from the gravitational pull of the earth and the moon to earthquakes undersea. We use these facts to shape our understanding of how our ecosystem called earth functions.

A conversation I have often with IR professionals is what I’ll call Story versus Structure.  “My CEO wants to understand why we’re underperforming our peers.”  We have a simple answer and an elementary model that demonstrates it. Yet it can be hard to let go of the notion that underperformance traces to a fundamental feature, the Story. “Our return on equity trails our peer group, so that’s got to be the reason.”

Now sometimes Story is the problem. When it is, it manifests in behavioral change. But don’t forget that the biggest investors are Blackrock and Vanguard. We’re told they’re perpetual holders. No, they’re perpetual trackers of benchmarks like the S&P 500 so they are perpetually in motion, relentlessly sloshing like tides. When these tides crash more violently it’s because money in 401ks and pensions is uniformly beginning to buy or sell, producing disparate impact in stocks.

It’s not Story but Structure. The market functions in a defined way, according to a set of measurable mathematical rules, just like the universe. If we omit some part of market function because it’s complicated it doesn’t cause the behavior to cease to exist. Every IR program today should measure behavioral change.

How many ETFs own your shares?  Our smallest client with market cap of $200 million is in 14. Most are in 30, 40 or more, some over 100. Each of these probably has options and futures and tracks an underlying index, which also has options and futures. All the components of each ETF and underlying index likely have options and futures, just as your shares might. There are exchange-traded notes that directionally leverage indexes and ETFs. Swaps that substitute returns in baskets of these for proceeds in other asset classes. Traders pair futures with stocks and change them each day. And throughout, Blackrock and Vanguard and the rest of their asset-allocation kin behind two million global index products move like massive elephants ever crossing the Serengeti.

Sound dizzying?  It’s your ecosystem. The good news is we’ve reduced its complexities to a set of central tendencies and now we have Alerts that signal when these change.

Why should you care in the IR chair? We’ve got a friend who’s a realtor in Steamboat Springs. She knows everything about it, down to the details of any house you can mention that’s on the market. She knows which neighborhoods get sun in the afternoon, where you should be for easy access to amenities. She knows her market.

We want you to know yours. We hope to help you move from seeing price and volume as a tide moved by mysterious forces to understanding your ecosystem and what distinct behavioral change is behind volatility.

That in turn makes you a powerful expert for your Board and management team. You don’t have to do it, of course. But the quest to be better, to know what there is to know about the market you serve is the difference between something that can become mundane and an enterprise ever fresh and new, an exhilarating exploration.  Some volatility, so to speak, is refreshing!

Defend Yourselves

You need to defend yourselves as public companies.

This clarion lesson comes from last week’s trading halt at the NYSE though we think the exchange handled the outage correctly. Humans want pictures of perfection like Saturday’s Balloon Rodeo in Steamboat Springs. But don’t expect serendipity in securities markets. Your equity is the backbone of your balance sheet, basis for incentives, currency for investments. Know how it trades.

The root of the NYSE’s July 8 200-minute trading penalty box is the Flash Crash, a May 6, 2010 plunge and recovery in equities that spanned about a thousand Dow Jones Industrials points in twenty minutes.  During that maelstrom, trades executed at stale prices because timestamps on orders didn’t keep pace with market activity.

Now five years later, the exchanges are aiming for a July 27 deadline on two updates to timestamps mandated by Finra and the SEC. The new timestamps will calibrate to 100 microseconds are less, with one coming from orders occurring at exchanges, and the other timestamp for ones flowing through broker-operated dark pools relying on proprietary data feeds.  The thinking here is better timestamping will improve market-function and offer better future forensics. For instance, was there separation between exchange and dark-pool prices as occurred in the Flash Crash?

You don’t have to know this in the IR chair. But what if the CEO or CFO asks? It’s the market for your shares. There’s a great deal more to it than your story, a point made stark in a moment.

The NYSE claimed it had been testing timestamps and made a mistake in a deployment. Why test new code when the Chinese market is imploding, Greece is teetering on the Eurobrink and volatility is exploding in US equities – all of it interconnected through indicative value-disseminations for global indexes and ETFs that depend on timestamps?

Be that as it may, the NYSE handled the problem appropriately by stopping trading, cancelling orders and focusing on getting operations fixed in time for the closing auction. That in itself points to the larger lesson, which we’ll articulate in a moment. We heard lots of talking heads say “our fragmented market is a plus in crises because people could continue trading.”

The outage in fact demonstrated the opposite. We measured in NYSE data that day an 18% reduction in Fast Trading generally for NYSE issues, and commensurately higher investment behavior. In other words, with trading halted for half the day, speculators were less able to interfere with real investors’ moves.

By extension, we can infer with data support that much of what occurs intraday is effort by arbitragers to spread prices among securities that must track benchmarks – market indexes – by the time trading concludes.

Guess who supports that effort? The exchanges.  I’m not castigating here. But if you’re depending on information from an exchange (or its partner) to understand your trading, you had better darned well know how the exchange operates.  When the Nasdaq charges traders to buy shares at its primary market and pays them to sell at the BSX platform, it’s helping traders multiply prices and spreads. Do you see? Paying traders to engage in opposite actions incentivizes arbitrage. All exchanges pay traders for activity that’s got nothing to do with investment.

I’ll rephrase:  The exchanges fragment markets purposely in order to sell data and create transactional opportunities. It would be akin to your real estate agent encouraging others to bid against you as you’re trying to buy a house.

The NYSE’s trading halt proved that a fragmented market harms investors and helps arbitragers, because when it was closed for three hours there was less fragmentation and more investment – but lower volume. Volume often confuses busy with productive.

Don’t track volume without also metering what sets your price! Yet that’s not the Big Lesson for public companies.  No, it’s that the single most important pricing event of the day is the closing auction. And the audience depending most on it is the one tracking benchmarks (not taking risks like active stock-pickers).  Blackrock and Vanguard – the Asset Allocators collectively and by extension.

The number one force in your market is tracking broad measures, not weighing your earnings. This money is perpetually owning and yet constantly trading to match index-movement. You must quantify the price-setting actions of this colossal demographic group. If you don’t, the intelligence you’re offering management about what’s driving your price is almost certain to be incorrect.

Defend yourselves with an objective view.  It’s part of the job. Counting on exchanges is yesterday’s way.

Babbling Happily

Picture a mountain river still crisp with snowmelt babbling happily.

Now imagine a town on its banks. Suppose thousands of people jammed the waters congenially in every kind of flotation device, laughing and floating downstream. That’s Steamboat Springs CO on July 4.

But babbling should not describe your interaction with the Board when you offer an investor-relations perspective. It’s the season, with earnings upon us soon again. There’s been extensive discussion at the NIRI Forum about what to convey to management.

Your IR section should articulate why shares underperformed or outperformed in the focus period (presumably the quarter), strengths and weaknesses in your equity (distinct from your story), and expectations about future performance. Sure, explain what you’ve been doing, who you’ve been seeing, what analysts and others have been saying. I offered them too as an IRO.  But management values strategic contribution. You’re the product manager of the equity market – which all else from the balance sheet to incentive plans depends on.

One IRO included four slides on the stock’s structure some weeks after a pivotal earnings report.  The first highlighted strengths and weaknesses, summarizing:

Strengths. Active value investors are buyers, setting price. Asset-allocators are back, signaling a return of passive sector money, a core driver. Short volume is down 14%, risk-management is down. These signal renewed investor-commitment and lower risk, the purpose of communication.

Weaknesses. Investors were surprised by weak execution and sold reactively, and despite improvements in risk-management behavior over intervening weeks, it remains high relative to long-run averages for the stock. Investors are challenging us to deliver.

Let me explain risk-management. Do you have life insurance? It’s protection that comes at a cost. Money spent on mitigation is less to spend elsewhere.  Investors put money into your shares, which are a risk asset, and they insure them with forms of risk-management or hedging – options, futures, swaps, pairs trades, shorting. If they spend more managing risk, it implies uncertainty.

When it becomes more profitable buying and selling insurance on your shares than it is investing in your story, that’s the definition of “short-termism,” and it’s measurable and observable. If risk-management declines along with investment demand, investors are planning to direct less money to your shares in the future. They hedge what they hold and they stop spending money on hedges that aren’t needed.

Back to our example, the IRO also included a graphical representation of market behaviors before and after results, a table of key comparative market-structure metrics either side of results, and a slide that set forward expectations, which concluded unwaveringly: “(the ticker) is now a VALUE proposition and must deliver VALUE results first before it can again attract growth money that brings price appreciation.”

Don’t miss this point. The company considers itself a growth story. But with value money as buyers following a reversal, retaining base value in shares requires a focus on value drivers and value results – cost-containment, wise capital deployment, returns on equity and so on.  You know them.

Management teams often confuse the business with the equity.  If all the investors in the market were buying fundamentals, the two would be the same. But over 30% of market volume is asset-allocation. Blackrock and Vanguard don’t listen to earnings calls but they’re the biggest investors. To them you’re an equity product, not a business story. Intermediaries drive half your volume. They’re middle men. To them, you’re a product with appeal to different consumers.

Discount these factors at your own risk. Don’t just list accomplishments, news, coverage, investors, in Board reports. Present your equity market strategically. Wrap that information in powerful directives reflecting the reality of the product.

This is IR in the 21st century.  You’re not tubing down a river of roadshows and conferences, a buoyant stenographer. You’re a product manager. We have the data, metrics and experience to help you manage and message best.

Cans and Roads

The problem with kicking the can down the road is what happens when you reach a hill.

Speaking of hills, Taos wasn’t what we’d expected.  Galleries cluster the square, yes.  We loved our circuitous bike ride along the foothills to Arroyo Seco. El Meze boasts views, an iron-chef James Beard winner and delectable fare. The Rio Grande Gorge nearby inspires awe.  But you won’t find posh on La Placita at Paseo del Pueblo Sur. Julia Roberts bought Don Rumsfeld’s 40-acre ranch here to escape Rodeo Drive, not to replace it. Taos is backwoods, weedy, agrarian, a bit Baja. Signature dish? Fry bread at Ben and Debbie’s Tiwa Kitchen down the dusty street from Taos Pueblo, a Native monument.

Do you know what a whole life insurance policy is? It’s money for death that first builds cash value.  You might suppose there’s little connection to either Taos or investor relations. Conventional wisdom taught folks to “buy term and invest the difference.” Why blend your hedge with your investment? Insurance by definition is the price you pay for the unexpected, and investing used to be the opposite.

At Taos Pueblo, for a thousand years the people bested marauders with adobe walls and wooden ladders. The apartment-like construction permitted entry through holes in ceilings doubling as doors. If enemies breached walls, occupants pulled ladders and the complex transformed into an impenetrable fortress.

Today Taos Pueblo is a reservation with a casino down the road. Doors and stairs have replaced holes and ladders and the wall once 10-15 feet high is now a short decorative reminder re-plastered annually for the tourists. Residents count today on the federal government.

Whole life insurance is effectively what’s gotten the planet into trouble. A policy is an agreement to exchange value. Say $1 million. It’s a contract costing you a sum and guaranteeing you a million dollars if you die, which also lets you leverage the amount you’re spending but with immediate impact on the contract’s value. It’s a complex derivative. AIG offered them. The contract guarantees a return, so AIG got insurance on the insurance from a reinsurer and transferred the remaining risk to brokers like Lehman Brothers, which bought mortgage-backed securities to offset promises to backstop AIG’s commitments to pay life-insurance contracts a guaranteed return.

This all works fine until you come to a hill. Take Greece. So long as the value of assets – homes, stocks, bonds, art, commodities, on it goes – rose, everybody got a guaranteed return and one out of three people could work for the government and still expect to retire at 50 with a pension. That concept came to a chaotic halt when stuff stopped rising in value. Now we wait for a conclusion or a shoe smacked into the can rolling up the rising road.

For most of a thousand years Taos Pueblo ruled its domain and relied on nobody.  Today you take Camino del Pueblo north from Taos Plaza until it dead-ends into a dirt parking lot, where you pay a fee to visit.

What were they doing for a millennium that worked so much better? One could say, “No, Europeans showed up. That’s what stopped it.” Sure. The lesson that you’re better off relying on nobody stands, even if that means you don’t have doors and instead have holes in ceilings, and ladders. Is anybody paying attention?

Back to IR. Your shares today are a whole-life insurance policy.  They’re an asset with associated costs and capacity for leverage via indexes and ETFs, options and futures. All of it is interconnected.  Your story becomes secondary to liabilities and yield.  I’m sorry to tell you so but it’s a fact.  It must be part of what you explain to management or you’ll be leaving out the linchpin of contemporary capital markets.

History is predictive analytics.  The fundamental flaw in our global model is simple. You cannot guarantee a future without hills and if your model depends on kicking cans down roads, sooner or later the can will roll back to you.

The solution?  Simplicity.  Occasional inconvenience. Something a bit Baja. You may have to crawl through a hole in the ceiling. Cutting a door in the wall makes life easier but supposes risk is gone permanently.

We’d warned in May that June might be the roughest month since last autumn in what is our ongoing Great Risk Asset Revaluation. It was, though it took longer than we thought.  We’re not through this turbulence. We’ve reached a hill, of some sort.

Taos Pueblo still stands and its people are delightful and resilient as are humans generally regardless of whole-life insurance policies and risk-transfer. But tomorrow comes, and convenience costs. That’s today’s capital-markets lesson.

Being Novak

What moves you?

I gave it thought during ModernIR’s tenth NIRI National (I think 18 of them total for me now) at the Hyatt Regency in Chicago, here looking north across the river from the 33rd floor. It’s easy to fall into habits and skirt that unique brand of satisfaction bred in a job done well. We humans are given to routine.

Worn out after, Karen and I repaired last weekend to a resort on Arizona’s Carefree Highway, inspiration for an iconic Gordon Lightfoot tune, and were moved to tranquility despite the anvil heat. The desert offers a rich diversity of flora and fauna (extra points for spotting the cottontail) easy to miss in the confrontational brutishness of its mid-June exterior.  We embraced it and reflected.

To give our best we must be motivated.  A week ago in Chicago, we were clustered at evening with others in the Purple Pig, dining on that gastropub’s moving cuisine. We’ve done it twice now and relished both occasions. This one offered something special.

Space is a premium and so we were seated by another couple, kind and engaged youngsters by Karen’s and my estimation, a few years in age behind us (how time flies). We struck up a conversation.

I didn’t ask them if could share it so I’ll change names to protect privacy. I’ll call him Novak, her Andrea.  He was born in Serbia, then Yugoslavia, the son of wealthy parents who lost most everything when war erupted there in the 1990s. They came to the US.

Novak found real estate. What he lacked in language and knowledge he offset with motivation.  In realty then, the fax machine was dominating communication and Novak found a man to modify a PC circuit board so it could continuously dispense listings. He’d collect them all in the office and cut and paste and copy and fax, the PC dialing nonstop.

Of course faxing drove people crazy, both recipients and colleagues. But “every morning I had an offer,” Novak said.  He was a machine himself.  With indomitable motivation to be the best he became it, selling a billion dollars of real estate.

A buyer for a building he was selling was Andrea, and they married and now ten years later they have two children and a real estate development firm with a hundred people and millions in assets and they support a charity theater they created to perpetuate their own sense of what it means to be inspired and moved.

One of my favorite IROs talks about the line between what she calls “mailing it in” and setting oneself apart in our profession. If you’re not careful, investor-relations becomes repetitious. Quarterly reporting, annual reports, road shows, conferences, it runs together. You start dismissing new thinking as an affront to convention (this is true in politics too).

What’s the secret to fresh and new every day?  Being Novak. Finding inspiration that moves you to set yourself apart.

What thrills about market structure still after ten years is its never-ending novelty.  Today’s investor-relations officer must know Story, sure. But that’s just half the job.  The rest today is Structure – the way the market works. The knowledge of it is powerful and it breathes added vigor into the patterns of our profession.

Motivation. I remember when Tim Tebow tweeted that one-word anthem. We don’t all have to be Novak, conquering heights.  But learning market structure today is motivation – and since Structure is as important to price now as Story (yup, true), you’ll be enhancing your career.

And that’s uniquely satisfying.

The Escalator

As the US investor-relations profession’s annual confabulation concludes in the Windy City, we wonder how the week will end.

The problem is risk. Or rather, the cost of transferring it to somebody else. Today the Federal Reserve’s Open Market Committee Meeting adjourns with Janet Yellen at the microphone offering views on what’s ahead. The Fed routinely misses the economic mark by 50%, meaning our central bank’s legions of number crunchers, colossal budget and balance sheet and twelve regional outposts supporting the globe’s reserve currency offer no more certainty about the future than a coin flip.  That adds risk.

The Fed sets interest rates – not by ordering banks to charge a certain amount for borrowing but through setting the cost at which the Fed itself lends to banks. Higher rates paradoxically present lower risk because money can generate a return by doing nothing.  Idle money now wastes away so it’s getting deployed in ways it wouldn’t otherwise.

If you’re about to heave this edition of the Market Structure Map in the digital dump, thinking, “There goes Quast again, yammering about monetary policy,” you need to know what happens to your stock when this behavior stops. And it will stop.

When the dollar increases in value, it buys more stuff. Things heretofore made larger in price by smaller dollars can reverse course, like earnings and stock-prices.  As the dollar puts downward pressure on share-prices, derivatives like options into which risk has been transferred become valuable. Options are then converted into shares, reversing pressure for a period. This becomes a pattern as investors profit on range-bound equities by trading in and out of derivatives.

Since Sept 2014 when we first warned of the Great Revaluation, the apex of a currency driven thunderhead in things like stocks and bonds, major US equity measures have not moved materially outside a range. Despite periodic bouts of extreme volatility around options-expirations, we’re locked in historic stasis, unmatched in modern times.

The reason is that investors have profited without actually buying or selling real assets. This week all the instruments underpinning leverage and risk-transfer expire, with VIX volatility expirations Wednesday as the Fed speaks. The lack of volatility itself has been an asset class to own like an insurance policy.

Thursday, index futures preferred by Europeans lapse. There’s been colossal volatility in continental stock and bond markets and counterparties will charge more to absorb that risk now, especially with a sharpening Greek crisis that edges nearer default at the end of June. Higher insurance costs put downward pressure on assets like stock-prices.

Then quad-witching arrives Friday when index and stock futures and options lapse along with swap contracts predicated on these derivatives, and the latter is hundreds of trillions of notional-value dollars. On top of all that, there are rebalances for S&P and Nasdaq indices, and the continued gradual rebalancing of the Russell indexes.

Expirations like these revisit us monthly, quad-witching quarterly. That’s not new. But investors have grown wary of trading in and out of derivatives. Falling volumes in equities and options point to rising attention on swaps – the way money transfers risk. We see it in a trend-reversal in the share of volume driven by active investment and risk-management. The latter has been leading the former by market-share for 200 days. Now it’s not. Money is trying to sell but struggling to find an exit.

Here at the Chicago Hyatt Regency on Wacker Drive, when a NIRI General Session ends, the escalators clog with masses of IROs and vendors exiting. Index-investing, a uniform behavior, dominates markets and there is clogged-escalator risk in equities.

It may be nothing.  Money changes directions today with staccato variability. But our job as ever is to watch the data and tell you what we see.  We’ve long been skeptics of the structure wrought by uniform rules, and this is why.  It’s fine so long as the escalator is going up.  When the ride ends, it won’t impact all stocks the same way, however, because leverage through indexes, ETFs and derivatives – the power of the crowd – has not been applied evenly.

This year’s annual lesson then is no new one but a big one nonetheless. Investor-relations professionals must beware more than at any other time of the monumental uniformity-risk in markets now, wrought not by story but macroeconomics and structure.

So, we’re watching the escalator.

It Aint So

The equity market is like Mark Twain said. The trouble ain’t what people don’t know, it’s what they know that ain’t so.

Thus did Sam Clemens articulate the difference between the price of ignorance and the consequence of arrogance. I thought about this distinction a number of times after reading a late-April article on proposed SEC policies for pay-versus-performance.

Now, don’t worry. I’d rather have a hole drilled in a molar than ruminate on SEC regulatory recipes. We’re a data-analytics firm tracking equity-market behaviors. No, what happened was that stories ran in press outlets, a number of which said these rules affected 6,000 public companies.

I was curious where the number came from and asked reporters. They referred me to the SEC.  I reached out to the Division of Trading and Markets, which after a couple weeks sent me to Corporation Finance, who in turn routed me to the Division of Economic Research and Analysis.

It’s June. I’m still waiting for an answer. It’s curious that a body responsible for articulating compliance to a swath of businesses would have difficulty determining how it tabulated the swath.

Which leads me to something you may not know.  The German equity market corrected. On April 10 the DAX hit 12,374 and yesterday closed at 11,001, a 12% drop. Retrenchment of 10% is a correction.

Over the weekend, Deutsche Bank, one of the world’s largest derivatives counterparties, fired its co-CEOs.  HSBC, the erstwhile Hong Kong and Shanghai Banking Corp., another global derivatives backer, Monday declared a shakeup that axes 50,000 and rebrands its UK outlets.

Whenever there’s an earthquake now somewhere in the world, I’m wondering about consequences.  Invariably if a temblor rocks Indonesia there’s a volcano soon erupting on some island, a quake in another region. The planet is interconnected – and so are markets.

Your smart phone today knows you, and the providers of the apps you use can triangulate your contacts, your patterns, your calls, texts, schedule, your travel. It’s at once startlingly efficient and disturbing that Something knows Everything.

Do you get alerts on stocks? Maybe you have Google or Yahoo or somebody else ping you when shares move a certain amount or volume is up some percentage. If you surf the web, whatever you search from Cadillacs to underpants will be served up in advertisements. Yet stocks are still bland price and volume as though what’s behind both is homogenous and disconnected – the exact opposite of all else around us from nature to finance to web apps.

Today we launched the first-ever Market Structure Alerts for public companies that reveal not price and volume but what kind of behavior is driving them and whether it’s buying or selling and when it changes meaningfully for just you. Nobody has ever done it.

I see Bloomberg is offering companies technical analysis, something 30 years old. We agree that you should consider it a fundamental fact and duty of IR to know your equity market. What we know that ain’t so, however, is that technicals are not setting prices. What sets price is what money is doing, and it’s following models today.

Tuesday, we publicly unveiled Gamma™, our proprietary measure for knowing if your marketplace is well-informed, your investors engaged, not through what they say but how they spend money competing to buy shares.

The SEC is still trying to figure out how it counts companies. Here’s another fact: There are fewer than 3,850 public companies in the National Market System, with massive money concentration in them through a decade-long explosion of indexes and ETFs.

ETFs are derivatives, part of a big cast of them now. There’s more than $700 trillion of notional-value in currency and interest-rate swaps, which are impacted by asset-class volatility.

German bunds in the past two months have risen from 0.05% to 0.99%, a gain of 1,880%.  Institutions use big firms like Deutsche Bank and HSBC for risk-transfer – assigning the consequences of the unknown to someone else through derivatives.

When global risk-asset revaluation got underway in Sept 2014 – a process that continues now with intensifying risk – we theorized that one or more major global derivatives counterparties would run into financial trouble.

Everything is connected today.  Your shares are connected to derivatives and counterparties, indexes and ETFs, currencies, and all manner of options, futures and swaps. Quad-witching looms next week, with Russell rebalances.

We can do something for you that not even Goldman Sachs can manage:  We know what behavior sets your price, and how it connects to the big picture. What investor-relations professionals have to confront in this environment is both what you don’t know and what you know that ain’t so. We can help on both counts.

Challenge your assumptions – and all the tools that haven’t changed in 30 years. The informed IR professional is a powerful expert to whom management will turn.

Quiet Midday

The midday equity-market silence is deafening.

Writing for the Wall Street Journal last week, Dan Strumpf roiled capital-markets constituents describing how stock-trading is now focused around the opening bell and the last half-hour, with volume dribbling otherwise.  NYSE strategists are now contemplating a midday auction.

Successful solutions spring from correct diagnoses. The issue isn’t that Everyone Goes Away at Midday. What’s occurring is symptomatic of structure in both the equity market and institutional investment. This is the giant elephant in the stock-market room. Concentration early and late in volumes reflects the explosive growth in passive investment.

The investor-relations profession predicates its existence on differentiating the corporate story.  You target investors appropriate for your stock. You get out there and set meetings to see investors.  You tell the story unflaggingly. You run a good business, delivering the results you’ve helped investors to expect.

Fine, good. There’s just one problem. This strategy obviates the bedrock principle of public speaking: Know your audience.  In the 1980s when stock-pickers dominated market volumes that weren’t coalesced at the open and close, rational investment behavior led and corporate competitive differentiation mattered most.

Today, the elephant is the core audience. For ten straight years investors have been shifting from picking stocks to allocating assets.  Over that time, the once-fringe notion of using statistical models to invest in stocks has become the predominant approach. Blackrock, Vanguard and their dollars by the trillions today see equities as products.

We flew to the Bay Area yesterday and after our first plane experienced mechanically related delays, we switched flights and I found myself crammed into a rear row next to a Schwab employee from the sprawling Denver office. She’s in the Registered Investment Advisor group, supporting independent planners. Schwab has now launched “robo advisor” services for both retail and advisory markets in response to growth at firms like Betterment, Wealthfront, Personal Capital, Motif Investing and others.

These automated investing services identify your preferences and goals and then construct a model to match them. In Schwab’s case the models are entirely ETF-driven and rebalance daily to match allocation targets.

Advisors could have ignored the elephant trampling the traditional model. The smart ones are embracing them. There’s a lesson for public companies: The elephant of passive, model-driven indexes and ETFs isn’t obscuring your audience. It IS your audience. This is what institutions are doing now.

That doesn’t mean you stop telling the story. It does mean that what you measure, how you gather investor feedback, what you tell management about stock-valuation and how you target investors – in fact, how you see the job – must change. We can’t ignore the giant passive-investment elephant in the room, and go on doing the same things.

Which gets back to silence at midday. Indexes and ETFs are paid to track benchmarks. Tracking is best served by orders near the close. As passive investment has exploded, volume has concentrated in the closing half-hour to mark broad measures.

The opening frenzy is also a consequence. Traders hoping to move index components for arbitrage opportunities act early in the day, leading to frenetic sprints at the bell.  And buttressing this proliferation in model-driven money is mushrooming derivatives-use, from over-the-counter options to fixed-for-floating equity swaps, all of it about the elephant in the room and arbitrage. And 44% of market volume is rented – short, borrowed – to boot.

It’s all related.  A midday auction won’t help the elephant in the room or anyone else because it hasn’t diagnosed the problem. What might help is 24-hour trading. Indexes would be relieved of the need to be near a close.  But investment would then devolve into relentless and repeating arbitrage even more than now, the continuous plucking of profits on slight separations between securities.

We could disconnect markets and disabuse ourselves of the false premise that all need the same price regardless of size – which would bring the Passive Investment juggernaut to a halt and level the playing field again for stock pickers.

That’s not going to happen. Anytime soon, at least. In the meantime, IR professionals, embrace the elephant and make measuring its movement a core part of the job because it’s your core price-setter. It’s concentrating volumes.

And that’s the quiet truth.

Trading Through

Memorial Day is a time for reflection.

We marked it by viewing American Sniper, introspective cinema on prolonged war.  There comes a point along that continuum where people begin to feel helpless, caught by something they can neither fix nor change.

That of course got me thinking about the first Equity Market Structure Advisory Committee meeting, convened May 13 without anyone from the issuer community on hand.  Chair Mary Jo White tasked the team with weighing Rule 611.

Fight the eye-glaze urge that overwhelms at mere sight of the name. If you’re a participant in the equity market as all public companies are, you need to know how the market for traded shares works.

Rule 611 is one of four key tenets of Regulation National Market System, the regime behind our current terrific marketplace, and says trades cannot occur at prices worse than those displayed at another market in the national system. We say Order Protection Rule or Trade Through Rule because it prohibits “trading through” a better price.

The thinking was if brokers were jobbing clients with inferior prices, how do you stop it? The old-fashioned way of doing that is how you buy a car. You do some comparison-shopping, and enterprising folks create apps like TrueCar (which is what ECNs were!).

Perhaps concluding that humans buying and selling stocks are just too busy to take responsibility for getting a good deal themselves, the SEC decreed that all orders capable of setting market prices must be automated and displayed by exchanges. As the memo’s authors write, “If a broker-dealer routes an order to a trading venue that cannot execute the order at the best price, the venue cannot simply execute the order at an inferior price.”

This is why algorithmic and high-frequency trading exploded. But the SEC deserves credit here. In an unusually blunt and rather readable treatise prepared for Committee members, the SEC admits its rules “significantly affect equity market structure.”

What the SEC really wanted through Rule 611 was more limit orders, or stock-trades at defined prices instead of whatever one is best at the moment. “The SEC believed,” the memo says, “that greater use of displayed limit orders would improve the price discovery process and contribute to increased liquidity and depth.”

The opposite happened, and the SEC is again forthright, saying “limit orders interact with a much smaller percentage of volume today than they did prior to Rule 611. This development may suggest that Rule 611 has not achieved the objective…”

Supporting that conclusion, earlier this year Fidelity and fellow investing giants said they will launch a marketplace for stocks called Luminex Trading & Analytics. Other members are Blackrock, Bank of New York Mellon, Capital Group, Invesco Ltd., JPMorgan Asset Management, MFS Investment Management, State Street Global Advisors and T. Rowe Price Group Inc. The cadre manages assets topping $15 trillion.

These are your owners. The stock market isn’t working for them. The SEC is talking about it – even admitting errors. All the major exchanges in the past year – NYSE, Nasdaq, BATS Global Markets – have proposed big changes.  IEX, famed from Flash Boys, is working to create a radically different exchange model.

Yet 90% of CEOs and CFOs at great American public companies don’t know investors are unsatisfied or that everyone else in the equity market is talking about fixes. That’s not because they can’t grasp it. They don’t know because IR isn’t explaining it.  You can’t expect exchanges to do it. They serve multiple constituencies and we’re the least economically meaningful, to be frank.

This can be the Golden Age of IR if we seize the opportunity to command a role in market-evolution. IR sells products – shares of your stock. If they were widgets, we’d know every intimate detail about the widget market (executives would expect nothing less).

So why not the stock market? (Hint: We can help you drive this organizational change!)