May 22nd, 2013 — The Market Structure Map
If you won the lottery, what would you do?
What about the IR lottery? If you could have anything you wanted, know any detail, command any price, possess every tool, what would you most wish for in the IR chair?
It’s a darned good corporate gig, as corporate gigs go. You could say, “I’d like to be CEO.” That’s a fine aspiration and I hope we see more folks move from the IR chair to the head of the boardroom table. About the only thing the IR department wants for – given how strapped it generally is for staff – is time managing people. But it covers every other thing, from operations, to strategy, to financial performance.
Would it be better targeting tools? I’m long removed from the grunt work of building the shareholder base, but I’ve done it. Story and audience – investment thesis and shareholder profile – never go out of style. If you could have the best targeting list, so good the Justice Department would subpoena it if you were a news reporter…well, that would be nice.
How about the skills for writing the perfect earnings release? Say you could hire some great writers. Merge the alkaline prose of Cormac McCarthy with the verve and sass of Jim Harrison and the poignant pacing of Alice Sebold. Your press release would be the talk of Wall Street. No Country for Old Men, The Great Leader, and Lucky, rolled up with financial statements and a GAAP reconciliation. Analysts would hang on your every perfectly turned phrase.
Maybe what you dream about is the ultimate website. Imagine a destination more intuitive than an iPhone, more informative than a National Geographic Special, so artfully compelling that your account rep at the ad agency would shake her head in amazement and yet so compliant that your General Counsel would nod approvingly in agreement.
None of those? Maybe it’s…The Answer. You’re in the hallway and your stock is up 2.5% on the day while the peer group is down and the S&P 500 is sideways. Here comes the CEO, she flashes a smile, says, “Good day for us. What do you think drove it?”
Oh, for the perfect answer. “More buyers than sellers!” No. That’s not good enough.
“The acumen in the IR chair you could recognize better at bonus time!” Tempting.
You can work your IR fingers to the bone, do everything right, and you’re still not guaranteed the result you want. And it all can ring hollow without The Answer.
What if you said: “I’ll tell you tomorrow exactly what behavior was behind it.”
What’s that worth?
May 15th, 2013 — The Market Structure Map
Whole swaths of stocks moved 3% yesterday. You might thank Dodd-Frank for it, even if David Tepper gets credit (if you heard the Appaloosa Management founder’s interview you know what I mean).
To understand how, ever heard of a Rube Goldberg Machine? It’s an unnecessarily complex device for doing something simple. Cartoonist Reuben “Rube” Goldberg turned his own name into a rubric for obtuse machination with humorous creations like the self-operating napkin.
So your stock rose sharply for no apparent reason. Some will say it’s because David Tepper, who made $2 billion last year on a belief in strong equities, said on CNBC that “shorts should get out the shovels because they’ll be buried.”
But the answer to why your stock and maybe your sector yesterday moved, and how Dodd-Frank is a factor may be more like a Rube Goldberg Machine. MSCI global indexes rebalance today, and ahead of that we’ve seen surging high-frequency trading, telling us money is benchmarking ahead to equity indexes at newly higher rates. Options expire tomorrow and Friday, with VIX volatility instruments lapsing May 22, giving arbitragers better opportunity to pairs-trade.
And Dodd-Frank’s deadlines on swap-clearing rules take effect in June, so this is the last pre-central-swap-clearing options-expirations period, which set dates for swaps too.
Ever heard of single-stock futures? It’s a way to go long or short shares without buying or borrowing. There’s even an exchange called OneChicago owned by the Chicago Board Options Exchange, CME Group, and Interactive Brokers, for electronically trading these contracts where two parties agree to exchange a set number of shares of a given stock in the future at a price determined today. Also popular are Narrow-Based Indexes – futures contracts on a small set of securities, say, from an industry or subsector. Continue reading →
May 8th, 2013 — The Market Structure Map
If you appeal a parking ticket to the Parking Department, what’s your expectation of objectivity? The Parking Department collects revenues.
Which brings us to word circulating last week from CEO Duncan Niederauer that NYSE Euronext and other exchanges are confronting the growing problem of off-exchange trading. “It impacts the quality and integrity of the U.S. capital market – and ultimately the ability of markets to enable companies like yours to raise capital efficiently,” Niederaur wrote in a letter to issuers (which a variety of alert readers passed along to me).
Shouldn’t we first ask why money has fled displayed markets? Private equity is working great. It’s a non-displayed market. Pensions and endowments have nearly twice as much money in private equity than public equity today. Investors aren’t forced to transact off the exchanges. They choose to.
Now exchanges want regulators to herd them back to displayed markets…for your good? Or for theirs? There’s a biblical proverb that says, “The first to present his case seems right, until another comes forward to question him.”
I think fragmented markets are a problem. But the reason the NYSE and other exchanges want trading between brokers to move back to exchanges isn’t for capital-formation purposes. It’s because the NYSE and other exchanges are data and technology vendors. NYSE Technologies last year generated $473 million of revenue supplying data, circuits and technologies to those trading your shares. Continue reading →
May 1st, 2013 — The Market Structure Map
What if we forecasted the weather on temperature moving-averages?
It would seem silly. After all, ENIAC ran the first mathematical computations for a weather model in 1950. ENIAC is not an Icelandic singer. It’s the first true computer and was built by University of Pennsylvania professors in 1946 with funding from the United States Army.
Now, TV weather departments use models that consume data about jet streams, moisture, temperature fluctuations, topography and other factors to project outcomes. For instance, those models say it’ll snow in Denver tonight after 80-degree temperatures the past three days. Chances are they’re right. It’s a significant predictive advance over the old method, the Native American Rock model, in which a rock was hung on a string outdoors. If the rock was wet, it was raining. And so on.
Humans use mathematical models in many predictive ways today. In a subset of weather-forecasting, models anticipate the development and trajectory of hurricanes. We track seismic activity to forecast earthquakes with some measure of warning.
In one of the most interesting applications of mathematical modeling, scientists searching outer space for planets like ours have now identified at least one in a solar system beyond our own. How? With instruments so precise that they can measure differences in light as fine as turning a flashlight on and off on the moon. Slight dimming in measurable light is evidence of a shadow being cast along a path – proof of planets. Continue reading →
April 24th, 2013 — The Market Structure Map
We assume investors know how markets work. What if they don’t?
Patrick Armstrong, new president of the Securities Traders Association of New York (STANY), told Traders Magazine yesterday that the buyside has been absent from the market-structure debate.
What debate? If you joined the IR profession in the past 15 years, you may be unaware that stocks today trade radically unlike any other time in the general history of capital markets. It’s not a technology question. Things change. Machines convert human processes to automated ones. That’s normal.
When steamboats flourished on the Mississippi River, what had been hard – rowing upstream – became an easy ride. Travel took on an aspect of leisure. It moved from essential to enjoyable (air travel has gone the other way, as I was reminded yet again flying yesterday from Denver to Newark). It was still travel, though.
What’s the purpose behind trading stocks today? Don’t listen to what somebody tells you. Look at the data – which you do if you use Market Structure Analytics. The data say that the purpose of trading markets is to move things around for profit. That’s 85% of your volume.
If the exchange listing your shares had told you that the fees you pay would give you access to a bunch of short-term traders moving your shares around so the exchange could profit on data revenues, would it have changed your view of the market?
“I want [the buyside] to tell me their opinion on the direction of our market structure. I believe that those who are for the status quo, those who say everything is fine, are the ones to be wary of,” Armstrong said. Continue reading →