Entries Tagged 'liquidity' ↓

Apr 9: The Recovery

It’s all in the recovery.

That’s the philosophy put forth by a friend of mine for dealing with unpleasant facts.

I think the chief reason for the recent swoon in stocks was not anemia in the job market but a sort of investor outrage. You can’t troll a trading periodical or blog or forum without wading through rants on why Michael Lewis, author of the bombshell book Flash Boys on high-speed trading, is either guilty of torpid whimsy (a clever phrase I admit to swiping from a Wall Street Journal opinion by the Hudson Institute’s Christopher DeMuth) or the market’s messiah.

What happens next? Shares of online brokerages including TD Ameritrade, E*Trade and Schwab have suffered on apparent fear that the widespread practice at these firms of selling their orders to fast intermediaries may come under regulatory scrutiny.

What about Vanguard, Blackrock and other massive passive investors? Asset managers favor a structure built around high-speed intermediation because it transforms relentless ebbs and flows of money in retirement accounts from an investing liability to a liquidity asset. Asset management is about generating yield. Liquidity is fungible today, and it’s not just Schwab selling orders to UBS, Scottrade marketing flow to KCG and Citi or E*Trade routing 70% of its brokerage to Susquehanna.

It would require more than a literary suspension of disbelief to suppose that while retail brokers are trading orders for dollars, big asset managers are folding proverbial hands in ecclesiastical innocence. The 40% of equity volume today that’s short, or borrowed, owes much to the alacrity of Vanguard and Blackrock. The US equity market is as dependent on borrowing and intermediation as the global financial system is on the Fed’s $4 trillion balance sheet.

Hoary heads of market structure may recall that we wrote years ago about a firm that exploded onto our data radar in 2007 called “Octeg.” It was trading ten times more than the biggest banks. Tracing addresses in filings, we found Octeg based in the same office as the Global Electronic Trading Co., or GETCO. Octeg. Get it?

Now Getco is merged with Knight and on the floor of the NYSE as KCG Holdings. Goldman Sachs is selling the old Spear Leeds specialist business to IMC Financial Markets, a high-speed trader out of Amsterdam and Chicago. Virtu is a designated market-maker. Only Barclays on the floor isn’t a bona fide fast trader. But lots of firms route to them (iShares?), and they may share rebates.

The cat’s out of the bag. Stuff is at best fishy out there. What now? As the founders of this republic observed, humans are more disposed to suffers ills while they’re sufferable than to exert the energy necessary to right wrongs. So, probably nothing.

But there’s been a ripple. As the DJIA dropped 300 points Apr 4-7, the behavioral culprit was bottom-up money. Thoughtful participants were rattled.

A subtle insinuation may spread, because the act of observation alters outcomes. To wit, we saw a glob of limit-up/limit-down trading halts yesterday. At 5p ET. The market was closed and LULD circuits don’t break after 3:30p ET. Huh? Probably a test – but why?

The point: Confronting problems always comes with consequences, which ought not but tends to prompt human beings to avoid confronting problems. Whatever follows in days or weeks – say a market shudder – remember that it’s all in the recovery.

PS – Come join us at the Philly NIRI chapter tomorrow morning!

June 5: Equity Supply Chain

Dollar General (NYSE:DG) dropped 9% yesterday, offering a lesson to investor-relations professionals.

Before that, a plug: At NIRI National next week I’m paneling with the CEO of short-seller Tesseract Management and the head of securities-lending for Franklin Templeton on short-selling strategy and practices. Longtime NIRI fixture Theresa Molloy has organized a great discussion and will moderate. And please visit ModernIR at booth 719, our eighth straight year in the exhibit hall.

For Dollar General, revenues were light and guidance lighter, margins weakened due to the products folks were buying last quarter, and inventories rose 21%. Investors and traders can examine facts about the structure of Dollar General’s market, from margins to supply-chain, and make value judgments (which will be distorted by other market behaviors, however).

Have you considered that your equity market is also affected by logistics, supply-chain and who’s consuming the product? We perhaps never imagine that the stock market has the same characteristics and limitations of other markets. Have you gone to the shoe store and they didn’t have your size in the brand you wanted? How come that doesn’t happen in the stock market? Continue reading →

Apr 24: Enlist Investors

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 →

Mar 27: Hired ETF Guns

I dare you.

Ever say that as a kid? “I’ll give you a dollar if you—” (fill in the blank)

Last week the SEC approved a plan by the NASDAQ for sponsors of ETFs trading less than a million shares daily – 93% of ETFs – to pay $50,000-$100,000 annually to market participants if they dare to trade any of these ETFs more aggressively.

We opposed this plan because it allocates dues and fees specifically, not equitably as the Exchange Act requires, and it promotes statistical arbitrage – trading securities for spreads. That’s harmful to buy-and-hold investors and the issuers who seek them out.

The NASDAQ argued – successfully – that stimulating trading in weak ETFs unattractive to automated market-makers will shrink spreads, boost volumes and benefit investors.

Yesterday at TABB Forum, a news site for the trading community hosted by influential consultancy the TABB Group, Stephen Bain from RBC Capital Markets wrote a piece called “The Hidden Cost of Tighter Spreads.” RBC studied trading before and after spreads between the best prices to buy or sell tightened through decimalization and automated market-making.

Bain wrote: “Our initial analysis documents a marked increase in short-term price gyrations for individual stocks, which have effectively doubled from pre-2000 levels to present. This finding represents a significant increased cost for investors – entirely contrary to claims that lower execution costs now prevail.”

We arrived at similar conclusions. The average US stock has Total Intramonth Volatility (TIV) of roughly 40%, calculated by subtracting the low price from the high price each day, dividing by closing price, then tallying those over 20 trading days. Continue reading →

Feb 20: Maker-Taker’s Mark

Is it diluted?

That’s what everybody wants to know about the market. Are gains for broad equity measures, seemingly epic like my skiing Saturday at Copper Mountain, real or watered down?

That’s actually not our story this week. But we’re so fascinated by what market structure shows that if you huddle in here we’ll share observations. The dollar declined when Japanese Prime Minister Abe said Monday that either the Bank of Japan creates inflation or the government will rewrite its charter. That means more currency devaluations for everyone (if your money buys less tomorrow than it did today, that’s a devaluation whether called one or not).

So stocks rose yesterday. Also helping stocks, money was hedging at options-expirations Feb 15. When investors hedge they tend to invest more funds. Sentiment is okay, too, finishing last week at 5.38 (on a 10-pt scale), up from 5.05 to start the week. Yesterday it was down to 4.71, by far the lowest level all year.

All over, short volumes are down compared to long volumes. That’s a loaded message. Higher short volumes mean more competitive markets. But lower short volumes also mean demand for wholesale short positions is down and shorts are covering. Which is good.

Talk about mixed messages! Investors want stocks to rise but are wary. Lower overall short-interest (bullish) and some short-covering (bullish) also means money is less prepared for the unexpected, and that markets aren’t as competitive as they should be when prices are rising. Pray for no surprises or we’ll have a monumental down day.

Which brings us to our story. Beam, Inc., distiller of Maker’s Mark, said last week that to stretch its oak-aged bourbon it would cut the alcohol content. Drinkers recoiled in horror and disgust. They’d rather do without than do with less for the same price. Beam backed down. Continue reading →


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