Ever since I started ModernIR in early 2005 we’ve been hindered by one thing: me. That’s why I’m delighted to announce a dramatic expansion of the brain trust with the arrival of my brilliant bride, Karen Quast, later this month to head operations.

A CPA by way of Texas A&M and PriceWaterhouseCoopers, Karen moved on to finance at Duke Energy. At DCP Midstream, the joint venture between Duke successor Spectra and ConocoPhillips, Karen took the IR chair to spin off a limited partnership by way of a December 2005 IPO on the NYSE, and she’s been there since. Having her here at ModernIR is like winning the lottery. We’ll finally have superior leadership. Karen is a doer (and she’s super good-looking to boot).

Two other notes: I’m speaking on market structure at the Conference Board’s IR Council in New York Thursday March 11. I’ll be in Silicon Valley March 24-25. If you’d like to meet while I’m out west, I’ve got four spots left on the docket. Drop me a note.

Let’s turn to trading. Something may have changed in March. Program trading – that equity river of life comprised of the crowd’s money – is down. Yet markets are up. How can that be? If programs decline, there’s less selling along with less buying. Trading models continued apace and a supply/demand imbalance formed. It’s like a tug of war where one party lets go of the rope. By our measures in March so far, rational buying is around 6% of volume, while forms of risk-management and speculative trading make up the other 94%.

That may not be true for your stock. Traders aggressively seek anomalies. But whatever the behavior setting your price, it’s evident in market structure. Sometimes it’s a yawn. Other times, it’s eye-popping. Knowing is always cool.

Skeptics say you can’t know what’s behind trading because volume is anonymous. So is the wind. But you can tell which way it’s blowing and what affect it’s likely to have. We take all the breezes and put them together and see if the crowd is setting wind speed, or something else.

You hear all kinds of things about trading. Fifty percent is in programs. Seventy percent is high-frequency. Half the volume is ninety percent algorithmic, to take Yogi Berra’s witticism about baseball and twist it.

So what exactly is it? We can guarantee you that more than 90% of volume is affected by market-structure risk management factors. If you take 100% of your volume, there is a very good chance that 70% of it, give or take, is “high frequency trading,” or forms of arbitrage, market-making and programmed volume designed only to profit from small moves or market inefficiencies and to manage portfolio trading risk or costs. In other words, it’s not there to invest in your stock.

How does that make sense?  Some program trading is churn trading.  Some risk-management volume is, too.  But altogether, it’s mostly fast-moving and almost entirely mathematical.

Exchanges and specialists focus on your biggest market makers. Many look at block trades.  That activity matters less than you think to your price.  It’s the crowd and it’s following the trend. But who’s setting the trend?

All order flow behavior must meet the same market rules, regardless of purpose or time horizon. That alone enables us to see differences. Most activity follows the crowd – which is why most fund managers don’t outperform the market. Some volume speculates on the movement of the crowd, and other volume hedges against the possibility that the crowd is wrong. We don’t have to know who’s doing what; all we have to do is observe the interaction of all the diverse parties. Behavior, in context of rules, materializes.

And if you know the behavior behind your price and volume, you will feel a lot better about the IR chair under your behind, even if you don’t like what you see.

My lovely bride Karen said, “Maybe you should be less negative in the Market Structure Map.”

Only fort-two and I’m turning into a grousing old goat! I doubt many of you would disagree that I’ve sniped about the state of the markets the past few issues. There is method to my madness though. We want investor-relations professionals to be powerful, relevant, informed and cool. We believe knowing market structure is key to coolness.

But what do you do with it? One of our new trial subscribers, a big company you’d know, got its first market structure profile last week. Our systems found rational buying setting price on 2/22. We said, “Was there a reason? News?” They’d met with large institutional investors that day. That’s one use – knowing the real price from the trading and risk-management prices.

But the other crucial thing ties to my apparent glowering. We need to move Boards and management teams to learn how modern trading works and to care about equity markets – which are no place for long-term investors anymore. If everybody trades and nobody invests, in time these markets will have no capital-raising purpose.

You and I can’t change that. But your CEO can. Your Board chairman can speak up. Your independent directors have voices that matter. Right now, matter of fact, Congress is planning a big regulatory push. We’ve already observed a dropoff in rational investment in the data just since November. In some issues, volume is down by more than 40% in four months. But the amount of short-term fluid trading that owns nothing and risks nothing is higher than ever. The solution isn’t eliminating trading. Do that, and there will be no shares trading.

We need instead to revisit the purpose of equity markets. They should match growing, job-creating companies with investors willing to take chances on them. Instead, they’re where you trade stuff in minute, high-speed increments according to mathematical rules. Does that sound healthy to you? If it does, then the regulations coming down are fine.

Speaking of trading, DE Shaw runs runs the Oculus Portfolio, the Dihedral Portfolio and the Razor Portfolio. I don’t mean to pick on DE Shaw. Last week, Fidelity Capital Markets launched new algorithms called T-HAWK, Recoil and Adrenaline, which use real-time market-structure data to identify optimum execution prices. Fidelity also has Darksweep, an undisplayed liquidity aggregator hitting 40 venues. Everybody has similar tools.

Back to DE Shaw, these funds apply “mathematical techniques to identify profit opportunities arising from subtle anomalies affecting the prices of various securities,” to quote part of the firm’s quant strategies description.

It’s what works today. These things are great for ModernIR. Our business is booming. We’ve grown more in the past year than ever before. We can knock on about any door and get invited in.

What yanks my chain is the lack of substance in our equity markets and the way public companies take it without so much as a burp. If intermediaries make all the money, then the market is like insurance: overpriced and inefficient. 

So we hope the growing readership here at The Map helps management get engaged and make a difference.

What do air travel and equity markets have in common?

As background, we’re readying a comment letter for the SEC’s Concept Release on Equity Market Structure. Exciting stuff! (We heard your groans all the way here in crispy, crunchy Denver). Really, they did a good job and it’s worth reading. Continue reading →

The derivative we need is a weather swap. The Winter Olympics would pay a premium for that spare snow lying around unused on the east coast.

Speaking of derivatives, the dollar retreated today, and US equities rebounded. We all want it to be about investing. Commentary everywhere today polished bullishness to an economic sheen. But that won’t make it reflect reality. Money keeps buying short-term love because the direction of the dollar is like a blacksmith’s bellows on equities. Continue reading →

What a blast we had in the high country skiing last week! But now, East Coast, we here in Denver would like our snow back, please.

Everybody’s got an opinion on why the market is yinning and yanging. We, I believe uniquely in IR, look at market structure first. That is, we see the trading data and behavior, and then from it we ask, “Why did that happen?” Continue reading →