Tagged: 13F

Boxes and Lines

 

In the sense that high-speed transmission lines connecting computerized boxes are the stock market, it’s boxes and lines.

Also, stock exchange IEX, the investors exchange, hosts a podcast called Boxes and Lines that’s moderated by co-founder Ronan Ryan and John “JR” Ramsay, IEX’s chief market policy officer. I joined them for the most recent edition (about 30 mins of jocularity and market structure).

In case you forget, the stock market is not in New York City.  It’s in New Jersey housed in state-of-the-art colocation facilities at Mahwah, Carteret and Secaucus.  It’s bits and bytes, boxes and lines.

It’s superfast.

What’s not is the disclosure standard for institutional investors.  We wrote about the SEC’s sudden, bizarre move to exclude about 90% of them from disclosing holdings.

The current standard, which legitimizes the saying “good enough for government work,” is 45 days after the end of the quarter for everybody managing $100 million or more.

We filed our comment letter Monday.  It’ll post here at some point, where you can see all comments. You can read it here now.  Feel free to plagiarize any or all of it, investors and public companies. Issuers, read our final point about the Australian Standard of beneficial ownership-tracing, and include it with your comments.

Maybe if enough of us do it, the SEC will see its way toward this superior bar.

Without reading the letter or knowing the Australian Standard you can grasp a hyperbolic contradiction. The government’s job is to provide a transparent and fair playing field.  Yet the same SEC regulates the stock market located in New Jersey. Boxes and lines.

FB, AAPL, AMZN, NFLX, GOOG, GOOGL, MSFT, AMD, TSLA and SHOP alone trade over 2.5 MILLION times, over $80 billion worth of stock. Every day.

And the standard for measuring who owns the stock is 45 days past the end of each quarter.  A quarter has about 67 trading days, give or take.  Add another 30 trading days.  Do the math.  That’s 250 million trades, about $7.9 trillion of dollar-flow.  In 10 stocks.

Why should the market function at the speed of light while investors report shareholdings at the speed of smell? Slower, really.

Do we really need to know who owns stocks?  I noted last week here and in our SEC 13F Comment Letter both that online brokerage Robinhood reports what stocks its account holders own in realtime via API.

That’s a communication standard fitted to reality. True, it doesn’t tell us how many shares. But it’s a helluva better standard than 97 days later, four times a year.

Quast, you didn’t answer the question.  Why does anyone need to know who owns shares of which companies? Isn’t everybody entitled to an expectation of privacy?

It’s a public market we’re talking about.  The constituency deserving transparency most is the only other one in the market with large regulatory disclosure requirements: Public companies.

They have a fiduciary responsibility to their owners. The laws require billions of dollars of collective spending by public companies on financial performance and governance.

How incoherent would it be if regulations demand companies disgorge expensive data to unknown holders?

As to retail money, the Securities Act of 1933, the legislative basis for now decades of amendments and regulation, had its genesis in protecting Main Street from fraud and risk.  The principal weapon in that effort has long been transparency.

Now, the good news for both investors and public companies is that you can see what all the money is doing all the time, behaviorally. We’ve offered public companies that capability for 15 years at ModernIR.

Take TSLA, now the world’s most actively traded – we believe – individual stock. SPY trades more but it’s an ETF.  Active money has been selling it.  But shorting is down, Passive Investment is down 21% the past week.  TSLA won’t fall far if Passives stay put.

That’s market structure. It’s the most relevant measurement technique for modern markets. It turns boxes and lines into predictive behavioral signals.

And investors, you can use the same data at Market Structure EDGE to help you make better decisions.

Predictive analytics are superior to peering into the long past to see what people were doing eons ago in market-structure years. Still, that doesn’t mean the SEC should throw out ownership transparency.

Small investors and public companies are the least influential market constituents. Neither group is a lobbying powerhouse like Fast Traders.  That should warrant both higher priority – or at least fair treatment. Not empty boxes and wandering lines.

PS – Speaking of market structure, if you read last week’s edition of the Market Structure Map, we said Industrials would likely be down. They are. And Patterns say there’s more to come. In fact, the market signals coming modest weakness. The Big One is lurking again but it’s not at hand yet.

Time for Change

Seventy-two years ago today, the United States dropped the second atomic weapon in four days, bringing world war in Asia to dramatic conclusion.

Current relations with North Korea demonstrate the intractability of human nature. While human nature is unchanging, markets are the opposite. Yesterday famed bond investor Jeff Gundlach of DoubleLine Capital declared that his highest conviction trade is a bear bet on the S&P 500 and a bull bet on a higher VIX.

The VIX, the fear gauge, reflects implied volatility in the S&P 500 calculated by the CBOE via options. Everyone is short volatility, Mr. Gundlach says.  It can’t last he says.

Yet intraday volatility – the spread between average high and low prices during the trading day – has reached a staggering 2.9%. That’s 45% beyond the historical average of about 2%.  How can intraday prices reflect savaging by arbitragers while the VIX, predicated on closing prices, signals a placid surface?

One word: Change.  The market has been convulsed by it the past ten years.

Regulation National Market System in 2007 transformed the stock market into a foot race for average price. A year later, the global payments system heaved seismically.  High-frequency trading arced like fireworks on the 4th of July.

For public companies, reporting duties that ramped with Reg FD in 2000 and soared with Sarbanes-Oxley in 2002, were drenched yet more with Dodd-Frank in 2010.

At the same time that companies were being compelled to provide ever more information, investors were shifting by the trillions to indexes and exchange-traded funds that ignore fundamentals. Now, Blackrock, Vanguard and State Street, largely deaf to story, are top ten holders of nearly every US equity.

For public companies it’s been like paying to cater a party for a hundred and having your mom and brother show up. Stuck transfixed, frozen in time from the summer of 1975, was Form 13F.

You didn’t know where I was headed, did you!  Yesterday I had an earnest phone discussion with three professionals from the SEC (I’m leaking this information straight from the source, no anonymity required).  They were good listeners and interlocutors, nice people, and genuinely interested folks.

The discussion happened because I’d earlier sent a note to new SEC Chair Jay Clayton saying there was no more urgent need in the equity market than the modernization of Form 13F. Within a week I heard from two different SEC groups. That says the new SEC chair cares about you, public companies.

I shared my written testimony (thank you, Joe Saluzzi at Themis Trading. None of us would be anywhere without you and Sal.) from the June House Financial Services Committee hearing, highlighting one thing:

It’s been 42 years since we updated disclosure standards for investors.  This is not human nature we’re talking about, something timeless, changeless. It’s keeping up with the times – and we’re not.  The SEC chair who gets these standards current with how markets work is an SEC chair who goes down in history for changing the world.

I said the same to the three SEC staffers. I said, “There is no greater goodwill gesture regulators could extend to companies, which have borne ever higher compliance costs for coming on 20 years now even as the ears of investors have gone deaf, than helping them know in timely fashion who owns, and shorts, shares.”

They said, “Investors will push back.”

I said, “Dodd-Frank orders disclosures of short positions monthly. It hasn’t yet been implemented, and we don’t know what Dodd-Frank will be in coming years. But one thing is clear:  Congress thought monthly short disclosure was fine. Are we then to have long positions disclosed 45 days after quarter-end? That’s cognitively dissonant.”

They didn’t demur.

I said, “Companies fear you, you know that? You need to make it clear that you want them to engage. General counsels are loath to see their companies’ names in the same sentence as your acronym. You need to let them know you want to hear from them.”

They said, “We absolutely want to hear from companies.”

They think there’s merit to a stock market issuer advisory committee, another suggestion we offered Congress in June. This SEC edition wants to see business thrive. It’s the agenda.

Do we realize how great an opportunity for change is in front of us?  It’s that big, public companies. You could know at last, after 42 long years, who owns your shares every month, and who is long or short.  The world the way it is.

How to make it happen?  Not us. We’re market structure experts. Not policy experts. You’ve got to get behind NIRI, our professional association.

I bet if a thousand companies asked the SEC to ask Congress to make 13Fs monthly…it would happen in the next two years.  Maybe one.

It’s time for change.

Long and Short

Here’s a riddle for you: What’s long and short at the same time?

Your shares, public companies (investors, the shares of stocks you own too).  You saw that coming, right.  The problem is you don’t know who’s long or short.

Let me rephrase that. You can know in 1975 fashion who’s long.  That year, Congress required investors to report holdings, amending the Securities Exchange Act with section 13F.  Investors with more than $100 million of assets had to report positions 45 days following quarter-end.  Back then, investment horizons were long.

The problem is we have the same standard. Why? Bigger question: Why aren’t more companies asking?  After all it’s your market. You deserve to know who owns your shares, who’s long or short, and where your shares trade.  You also should know what kind of money trades them since a great deal of your volume is for the day, not owned (this part we’ve solved!).

Back to ownership, Exchange Traded Funds post positions every day by law. Why doesn’t everybody else?

“Quast, come on,” you say.  “Investors need some time to buy and sell positions without everyone knowing, if they’ve got longer horizons.”

We’re market structure experts. I can assert: nearly every time investors try to buy or sell in the market, traders know it. That’s why we measure what traders know instead of considering them “noise” like everybody else.

Fast Traders detect buying or selling, often before it happens. I liken it to driving down the road on cruise control. Your exit is coming up so you tap the brakes or take your car off cruise.  Anybody behind you can conclude you’re planning to exit.

Fast Traders observe how behavior slows. It’s how we knew June 5 that the tech sector was about to decline. And they see algorithms accelerating to merge onto the freeway. There’s a buyer. Let’s start lifting the price.  We observe all this in patterns.

Back to the point. If the problem with disclosing positions is a desire to protect investment plans, why is the most popular investment vehicle of our era, ETFs, doing it?

“Those are models,” you say. “They track benchmarks.”

Yes, but all over this country boards and management teams are getting quarterly shareholder reports from 13Fs and concluding that these investors are setting prices.  They’re inexcusably out of step with how markets work.  Isn’t that our profession’s fault? It’s part of the IR job to inform management about equity drivers.

Congress is trying to inform itself. We don’t want to be trailing Congress!  Yesterday there was a big hearing about equity market structure in the House Financial Services Subcommittee on Capital Markets.  They like long titles, you know.

Thanks to good friend Joe Saluzzi of Themis Trading, who testified live – read what he said – we were invited to offer written testimony from an issuer perspective on the state of markets and what would help issuers have fairer and more transparent participation.

It’s the first time ModernIR has been read into the official congressional record and I don’t whether to be elated over the opportunity or melancholy that it’s necessary.

You should read it. It’s how the market works today. In fact, read all the testimony. They say what we write here every week. Everyone’s in the know but the issuer community.

You deserve better, public companies. It’s your market and you’re excluded by those merchandising your shares from having a say in how it functions.

We made three simple proposals:  Move 13Fs up to monthly reports (we didn’t call for daily info!) and make them both long and short.  It’s been proposed before. Maybe this time we’ll get someplace.

We also proposed daily disclosure of trading data by broker. There’s no reason Fast Traders or anyone should be able to hide. Canada requires disclosure. Why do we have a lesser standard (none, in fact)? And we asked Congress to direct the SEC to form an issuer advisory committee so companies have a voice.

What’s central and imperative to this effort at better transparency for the IR job and the management of public companies?  Knowing how the market works.  We’re experts on it. That we were asked to offer an issuer perspective – nobody else from IR was – speaks to it.

The starting point is learning market structure. It’s a core part of the IR job in today’s market.  That’s the long and short of it. Ask us and we’ll help you help your executives.

Double Standard

Humans are often entertained by illustrations of absurdity through reality.

For instance, Treasury Secretary Jack Lew months ago said he’d like to address tax inversions but lacked authority.  Yesterday, Treasury imposed rules to limit inversions. My reading of Section Two of the U.S. Constitution reveals no lawmaking authority vested in the executive branch.

I could compile a book of examples. I won’t.  Instead, I’ll offer one for the IR chair and the public-company executive suite. In 1975, Congress added Section 13f to the Securities Act to “increase the public availability of information regarding the securities holdings of institutional investors.” I was eight years old then and had no idea I’d spend my adult life working in the capital markets with thus far no update to the provision.

NIRI CEO Jeff Morgan said in his weekly note to members yesterday that the Board had held its annual meeting with the SEC to discuss disclosure. “I am not sure we came to any concrete agreement on how we might traverse down the road to improving disclosure,” Jeff wrote.  He was talking about the burden of it.

In August 2000, the SEC imposed Regulation Fair Disclosure (Reg FD) to “promote the full and fair disclosure of information by publicly traded companies and other issuers.” Following and vastly increasing disclosure-costs was The Sarbanes-Oxley Act of 2002 (SOX as we call it), passed by the U.S. Congress to protect shareholders and the general public from accounting fraud and errors and to improve accuracy in corporate disclosures. I remember that my company spent about $2 million as a small-cap NASDAQ-traded firm with $200 million in revenues complying with Section 404 and other requirements the first year.

I recall an ensuing variety of rules through the Financial Accounting Standards Board and SEC Staff Accounting Bulletins, all adding time, effort, cost and disclosure. (more…)