The lawyers doing the writing at the SEC are good. The 104-page novella the Commission released last week with the Commodity Futures Trading Commission gallops readers spritely to an inconclusive denouement.

No offense intended. For anybody versed in trading markets, the report is logical and easy to follow. We agree with the description of underlying trading activity, even so far as the report’s conclusion that real buyers and sellers are about 10% of the market. There are charts that look somewhat like our models of market structure, illustrating trading share by market center (we do it by behavior). (more…)

Micro IR in Macro Markets

Remember that movie, The Truman Show? In this epochal fake reality program, a guy played by Jim Carrey lives on camera, unaware that reality is beyond both his view and his control.

This may be how stock-pickers feel in today’s equity markets. At least it’s getting attention, as Truman did in the movie. Reporters Tom Lauricella and Gregory Zuckerman got page one, right below the fold, in the Wall Street Journal last week for their column on macro forces in the markets rendering active investment moot. (more…)

Exchanges Propose More Price Controls

The Boii are back in town!

I refer not to the 1976 rock hit by the Irishmen of Thin Lizzy, but to the central European tribe that gave Bohemia its name. We just finished getting tribal in the Czech Republic and Austria, eating and drinking by bike from Prague to Vienna. And with the leaden nature of food and drink there, you’d not be advised to do one without the other.

Examining data, markets expected upside before the Fed gave more reason today. Where August trading showed striking amounts of speculative trading, indicating abundant day-to-day opportunism, September shows higher program trading, lower speculation and more selective rational investment. These are hallmarks of better certainty, even if the reasons are structural rather than fundamental. We take upside in whatever form it may come. We suggest you leverage it in your IR programs. (more…)

Give yourself a break! Okay, we’ll give you one. We’re cycling from Prague to Vienna, a wedding anniversary trip, and won’t be within writing distance next week. The Map will thus be on hiatus, back Sept 21.

We’ve had questions about the “quote stuffing,” article last week in the Wall Street Journal. In essence, gobs of immediate-or-cancel (IOC) trades gumming up markets might have contributed to the Flash Crash. It’s equity whack-a-mole, where trades pop up to draw fire, then disappear.

No form of equity order randomly appears in the markets, crafted by conniving traders. All must be submitted via rule filing to the SEC, and approved. So the orders being questioned by regulators now were earlier approved by the same regulators.

IOCs are not the choice of committed, rational money. These orders suit intermediaries, whose aggressive bids and offers keep spreads tight and markets liquid – which is what regulators and market centers seek. But there is an unintended consequence to managing, manipulating, and incentivizing behaviors – which is what crafting orders that fit certain participants best does. The markets may not do with the incentives what was hoped and expected. And notice, too, that issuers, whose shares are the blood of markets, rendered no opinion on IOCs. We should.

Remember, our market system is a “maker/taker” model that relies on manufactured volume. Buying and selling is incentivized – induced with payments and types of orders that encourage middle men with no interest in owning shares to be aggressive. Why? People fighting to outbid each other should mean low spreads and competitive prices for consumers, regulators reason.

The problem? Consumers aren’t setting prices. The forces being incentivized are. We have no real idea what value buyers and sellers place on stocks, because the entire model is unwittingly obfuscating prices. Every time someone has an interest in buying shares, a fast intermediary may run ahead and re-price the market. This is couched as “price improvement.”

So, it should be no surprise that there were clouds of IOCs around the Flash Crash. This is exactly how the system is designed to function. It’s sort of like looking at the vortex in your bath tub after you pull the plug and wondering if the vortex is responsible for water leaving, or vice versa.

Think about it. Rather than the causal link between IOCs and the Flash Crash, we might ask instead why these IOCs drew out zero, zilch, nada “natural” liquidity. That’s market lingo for “real buyers and sellers.”

A mad scramble by intermediary systems failed to induce buying and selling. So those systems pulled out. So the answer to our question is that real buyers and sellers were uncertain of prices and unwilling to commit. Real money did not, and still does not, know the price or value of stocks. That should be a huge red flag fluttering in the market breeze like Old Glory on Labor Day.

Which brings us to trading today, the first after Labor Day. Why was the market down? Because the dollar strengthened. The DXY rose $0.85, or 1%, the reverse of the market. Last week it dropped sharply and markets climbed 250 points in one day.

This is precisely the same thing that is wrong with trading markets. Governments around the globe are manipulating, managing and incentivizing behaviors. The result is not a recuperated economy but instead that manipulation becomes an end unto itself. I hope we stop before we’ve been incentivized right back down to warring city-states.

Speaking of warring city-states, it’s that season when the sellside tries to out-schedule each other with industry conferences. Do you know how host firms of conferences trade your stock? What’s their order flow like? What do they do around expirations? Do they list the derivatives trader at the top (don’t laugh, many do) of research notes?

The nature of a firm’s order flow can tell you about the money consuming your liquidity (on those occasions when it’s real). If you need more growth-style money but don’t have lots of market cap, you might attend conferences hosted by major structured products purveyors.

Committed buy-and-hold money? Focus on firms differentiating with soft-dollar programs built around research, rather than ones with multi-asset-class trading capabilities. Sometimes small conferences are better. One committed investor can change the speculative and risk-management behaviors in your trading – because someone runs ahead and re-prices.

These ideas must now be in the modern IRO’s arsenal. And with that, have a blast out there on the road. We will – spandex, spokes, sunglasses and all!

Missing the Mark in Algorithmic Trading

Do you think your stock trades well?

While you ponder, a confession: We’re guilty of a bait and switch. If I’d written “implementation shortfall,” which is what I mean, rather than “missing the mark” above, which is what I said, I might be responsible for a chain-reaction narcoleptic catastrophe, people randomly falling asleep mid-word and banging heads on laptops, iPads, desks, afternoon pub beverages. (more…)

There Are Spreads and There Are Spreads

Why do many stock prices move intraday by 3-5% or more when price spreads are in pennies?

Before we answer, we enjoyed New Orleans last week, despite humidity that had us struggling to distinguish the surrounding atmosphere from Lake Pontchartrain.

The NIRI Southwest Regional Conference concluded with brisk canvassing of key issues, wrapping on “would you choose an IR career again?” (Unanimous yes from panelists)

Bourbon Street hopped as usual, tourists with beer in cups labeled “giant donkey,” in so many words. We heard from the bartender at Pierre Maspero’s that (more…)

Thursday and Friday this week we’re in New Orleans sweating it out and moderating a Rapid Fire panel on hot topics at the NIRI Southwest Regional Conference. Karen and I plan to eat beignets and drink Sazeracs too. Probably after.

Recently Kate Welling at Weeden & Co. interviewed Prudential’s vice-chairman, Mark Grier about being public in 2010. I read it and asked if we could highlight it here. It’s critical knowledge for IROs and public-company execs now. (more…)


What does the word “actionable” mean to you?

It’s a decent name for a rock band, yes. But it means “what stuff can you do with this?”

Traders want actionable data – something to drive opportunity for profit. Investor-relations professionals want actionable tools – something that’ll improve stock ownership, share price, results of IR effort.

Knowing who owns your stock is good. But what actions can you take? Talk to sellers? That’s uncomfortable. Plus, unless you’re screwing up, selling is a compliment, an investment objective. The sellers should well buy again, when the time’s right. (more…)

Your Volume and the Maker-Taker Model

You’ve heard the saying “six of one, half-dozen of the other?”

The DXY, the spot market for the US dollar, declined 7% in July. Stocks were up 7%. May was a good month for the DXY, which rose from 81 to 87, roughly. May crucified equities and gave us the Flash Crash on the heels of a surge in the value of the dollar.

Is it six of one, half a dozen of the other? The dollar in your pocket loses 7% of its purchasing power versus other currencies in July. Stocks appreciate 7%. Call me simple, but it seems that when a thing you buy is worth more because the thing you buy it with is worth less, that these sort of cancel each other out. (more…)

Market Sentiment a Mix of Reactions

The saying goes that you’re better off keeping your mouth closed and looking like a fool than opening it and removing all doubt. Trading reminded us again about the wisdom in those words.

We’d warned that markets showed excessive arbitrage. Arbs capture net spreads between opposing trades and care little about price appreciation. When it’s high in the broad markets (and in specific issues, too), it often points to impending switches in the direction of money, say from one mix of assets to another. Why? Traders apparently detect algorithmic activity and move to profit from it.