Tagged: 13fs

Euphoria

The legal community was euphoric Tuesday on word stock exchanges listing your shares, public companies, aren’t immune from lawsuits claiming rules favor high-speed traders.

Bloomberg reported (news breaking so no updated link yet but case history is here) that a federal appeals court has overturned a lower ruling protecting exchanges from suits brought by investors and brokers claiming they were disadvantaged in markets through exchange practices ranging from data feeds to complex order types giving fast machines an edge.

The lawsuits hinge, I’m gathering, on a requirement in the Securities Act that exchange rules not discriminate against any constituency.

It’s something public companies should recognize. You’re an exchange constituency. If investors and traders have an expectation of advanced services, what about public companies?  You’re still calling people to ask why shares are up or down. You could do that in 1932, before the Securities Act passed Congress.

It’s conceivable that 2018 could be a great year for public companies in the way 2017 has been a great year for investors. Few (save Carl Icahn and some others) imagined on Nov 7, 2016 stocks were about to soar.  Euphoria now seems to abound like pot shops here in Denver on what we call the Green Mile from Alameda to Evans south on Broadway.

For companies it’s terrific when shares soar too (though LFIN, which debuted the 13th at roughly $5 and announced the 15th it was buying some blockchain outfit and then promptly roared to $130 and $4 billion of market cap without any revenue and via 21 volatility trading halts, is not exactly the sort of soaring that’s sustainable).

What’s needed more than slamming into the ceiling of all-time high Shiller PE ratios (not there yet but closing) is better disclosure.

Since 1975 not one thing has been modified in 13F investor disclosures. Back then we had rotary phones, human beings executed trades, and on May Day that year an obscure investment firm formed in Malvern, PA, calling itself The Vanguard Group.

Step forward to today and investors are still reporting holdings 45 days after quarter-end while Vanguard manages trillions, markets relentlessly morph, and high-speed firms rent 100 shares of your stock, trade it 5,000 times, volume is 500,000 shares, you think it’s big holders, and at the end of the day they own nothing.

Seem appropriate to you, this mismatch?  It’s decidedly not euphoric that public companies have been left out. One could say discriminated against?  Hm. SEC, are you listening?

So maybe in 2018 we can fix it. No need for Congress to act. Dodd-Frank did that in 2010 by creating a mandate for monthly short-position disclosures. Should long positions be disclosed 45 days after quarter-end? Or instead how about disclosing both long and short positions monthly?

That’s still well slower than machines but it would get us into the 21st century. How about it, SEC? Is this the Era of Transparency or is it just the Era of Euphoria?

Speaking of which, will euphoria last? So long as money pumps into Exchange Traded Funds, which don’t create any new shares of public companies but instead create shares of ETFs that reflect dollars chasing the same shrinking set of public companies that currently exists, yes. That’s a euphoric condition.

It’s also inflation. The reason the market behaves like Shangri-La is because the entire market is leveraged like a…well, like a currency that expands far more rapidly than the underlying economy.  Federal Reserve, are you paying attention?

Past all that, I think there’s plenty of reason for euphoria not only about better disclosure in 2018 but in the current season. Good things are happening economically.  There’s a lot of eggnog ahead.  Bowl games to watch while consuming adult beverages.  Chestnuts roasting on an open fire.

But euphoria wears off. We’ll talk about that next year.  Have an awesome holiday season!

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.

David Copperfield

The days are getting shorter. We’ve passed the longest one of 2017, Summer Solstice. Imperceptibly now the sun will move off its zenith.

Karen and I marked it here in Minneapolis before the NYSE’s Rich Barry and I talk market structure for the Edison Electric Institute’s investor-relations meeting today at the offices of host Xcel Energy downtown.

Last night in lovely and mild Minnesota at Café Lurcat off Loring Park south of central city, a group of us IR people were talking about measuring IR outcomes today.

“You track your owners in 13fs,” said one utility IR professional. “And you correlate your meetings with them, and we saw this one four times and their holdings went down, and this one over here not at all and they doubled positions.”

The problem isn’t IR.  It’s what’s being measured, and how it’s tracked.

Okay, we could go one step further.  If public companies were half as engaged in monitoring the market as the exchanges and high-frequency traders that have profited enormously from its opacity, we’d persuade officials to improve rules.

In fact, I’ve been invited to submit testimony for a congressional hearing next week on problems with financial markets such as the startling absence of companies from all rulemaking processes. Yes, congressional staffers see it just like we do.

I intend to articulate in the starkest terms how issuers are misled about the nature of their trading.  There’s no excuse for it. It continues because issuers are, paraphrasing that country song, treated like mushrooms. Google that.

Realistically, changing the rules takes time. What can we do right now?  You can know why intensive effort to track outreach and correlate it to ownership-change renders lousy results. What you’re measuring doesn’t reflect how markets work.

First, 13f ownership data is an act of Congress – from 1975. Forty-two years later everything has changed but the data used to measure ownership.  We had circular-dial phones then. Today your phone will talk to you.

Yet the 13f lives on (it’s Section 13f of the Securities Exchange Act, legislation expressly prohibiting discrimination against issuers). The measure was designed for a market where investors bought companies. Today 85% of trading volume daily comes from purposes and machines seeing stocks as products not stories.  About 48% of volume is borrowed every day – which doesn’t show up in ownership data.

Many hedge funds don’t have to report holdings because managed assets fall outside regulatory minimums. Exchange Traded Funds (ETFs) are posting assets daily while settlement data follows four days later – and 13fs post positions 45 days after the end of the quarter.  Half of daily volume has an investment horizon of a day or less.

About 13% of daily trading ties to derivatives, which don’t manifest in 13Fs. To wit, markets surged Monday and pundits declared it a return of enthusiasm for economic outcomes. The data showed a 17% increase in Fast Trading – an investment horizon of a day or less – drove Monday’s gains.

Machines were inflating equities to reprice the new series of options and futures trading Monday.  Yesterday counterparties were selling assets to cover short-term trading losses.

None of that is investment.  Much is sleight of hand. So is data that lacks answers.

What’s more, much trumps story. Interest rates, relative currency values, economic expectations and geopolitics, political elections and housing starts, central-bank actions and inflation and policy speeches, and blah, blah blah.

So what do you do?  First, start measuring the right data.  Ownership information cannot tell you what sets price.  Stop expecting miracles from your surveillance provider.  They’re great professionals but the rules around data make it a functional impossibility for you to find what you’re looking for in that data set.

Second, stop looking backward. Instead, do two things well from a messaging view.  Tell your story to a diverse palette of institutional relationships. Have a good follow-up plan.

Make these ideas science – matching product to consumer – and you’re helping the buyside find opportunities and the buyside in turn is helping you achieve the IR goal: A fairly valued stock and a well-informed market.

We have that science. We know every day what part of your volume is driven by passive investment and active investment. If you want help understanding the market, ask us. We do one thing well. Market structure.

Summarizing: Are the measures you’re using to benchmark your IR efforts a reflection of contemporary financial markets? If not, why not?

And why is your exchange, which makes money from rapid-fire trading, focusing your attention on shareholdings 45 days after quarter-end?  Feels like David Copperfield. Resist the illusion. You can and should have better information. Demand it.

Feedback

You’ve got to know what to measure.

Every time I interact with anybody from an airline to my company’s communications providers, I get a survey. “How’d we do?”

It drives me crazy. It’s like Claymation customer service:  Move something, take a picture.  Move something, take a picture. You’ve seen clay animation?  Wallace & Gromit popularized cartoonish clay caricature (and cheese!). Each picture contributed to forming movement and emotion. Every snapshot is feedback that when viewed together become the story. It works in cartoons but isn’t a good customer-service model.

We’re inundated with market information in the investor-relations profession.  The feedback loop is so intensive that it can somewhere morph from meaningful to white noise. You don’t know what you’re measuring or hearing. The sequence of snapshots doesn’t translate to meaningful film. There’s no narrative in the data.

Back when I was in the IR chair, I’d hear all the time that we’d broken through moving averages.  Initially, I exclaimed, “Oh!” and added, “Thank you!” It was only later that I realized moving averages told me little and certainly weren’t entertaining like Claymation. What should I tell management?  “Unfortunately, there’s been a breakdown in our moving averages, prompting a sharp shift in perception.”

Really?

Here’s another metric that confuses busy with productive. We have clients with high short interest. The measure derives from a 1974 regulation from The Federal Reserve to track borrowing in marginable securities accounts as part of aggregate money supply.

Borrowing is a good measure of risk. To that end, if you’re interested in a riotous three-minute explanation of what’s wrong in Europe, click here (it’s a video clip so be appropriately prepared).

But what if we’re not measuring borrowing correctly? Short volume, or trading with borrowed shares instead of owned shares, is roughly 43% of the total market. This measure wasn’t created by the Fed in 1974. It’s current. It’s Claymation. We’ve studied short interest and short volume and found that the former often is inversely correlated with price-movements, suggesting that it’s a lagging indicator of risk (and thus a lousy one). Not so with short volume.

The ownership measure extant today, 13Fs, was created in 1974 as well. It’s deplorable as feedback on institutional behavior, coming 90 trading days after it might have occurred. Today, over $1.7 trillion of assets are held by Exchange-Traded Funds that post ownership positions daily, yet trades clear “T+3,” or potentially four days out.

Do you think about these things in the IR chair? Perception is, “Our price continuously reflects rational thought.” Reality is something else, demonstrably and statistically.  Speaking of which, I’m hoping to take the NIRI Arizona chapter on a rollicking safari through market structure today. Process is more influential than purpose.

What you don’t want to do with your IR forensics is confuse busy with productive. You can track vast seas of data that neither offer narrative nor animate it.  What’s the right feedback mechanism? Reality! What is money doing right now and what’s the likely impact in the future, and what’s that mean to actions in my IR program and what I communicate to management? (more…)

Volatility Implications

Like a billboard reading, “Illiterate? Write for free help,” record demand for VIX futures in a market nearly devoid of volatility seems at best paradoxical and perhaps idiotic. But it’s a touchstone for institutional behavior now.

“The VIX” is the Chicago Board Options Exchange’s index of implied monthly volatility in the S&P 500 index. It’s called the Fear Gauge because ebbs and flows signal waxing and waning market uncertainty.

There are 34 different Exchange Traded Products (ETP) providing risk managers and traders variations on the VIX volatility theme. Record levels of ETP shares outstanding, according to an article yesterday in Traders Magazine, denotes extreme demand for volatility products. (more…)

Our Best Sentiments

Question: “Would you like more timely information about who owns your shares?”

Answer: Yes!

Question: “Would you be willing to ask for more timely information?”

Answer: Um…

Let’s change that “um” to a yes! You know about NIRI’s effort to shorten 13f reporting windows? Read about it here. All you have to do is fill out NIRI’s prepared template and email it to the address provided. There are 23 comment letters supporting the initiative as of March 5. With 1,600 companies in NIRI, we ought to be able to push the number up. See comment letters here: http://www.sec.gov/comments/4-659/4-659.shtml

This effort illustrates the difference between saying something and doing it (and there’s some serious doing here, which is great news!).

Speaking of which, TD Ameritrade is separating the chatter from the chart in its six million retail accounts with the TD Ameritrade IMX, an index showing what retail investors are thinking by tracking what they’re doing. Sentiment out this week for February was the best in stocks since June 2011.

Of course, one measure doth not a market make. We have an algorithm that looks for relative flows from retail money, and we saw more this period too. But other measures differed. As of March 5, Sentiment was 4.55, just below Neutral. We measure Sentiment by tracking relative changes in market-share for big behaviors and weighting that movement according to midpoint price-changes. It’s like a market-cap-weighted index. Statistically, 23% of clients had Negative market sentiment, 68% were Neutral, and 9% were Positive. (more…)

Issuer Data Initiative

“Nobody seems to care about the issuers.”

That short sentence in an email from an investor-relations officer recently reflects what many in our profession feel about share-ownership and trading data for public companies.

Back in March 2011, we decided to do something. You old-timers here at the Market Structure Map, you remember? With hope, fanfare and even media coverage, we launched our quixotic quest for better data. We beseeched the SEC, FINRA and staffers for members of Congress on committees regulating markets.

Turns out we were more like Don Quixote than Sancho Panza. Moving Congress is nearly a fool’s errand. And we also found that unless it produces dollars for regulators, yours is their last priority. But we also made a startling discovery about how to succeed.

Here’s the problem today. Shares trade in fractions of seconds but reports on ownership follow months later. Vanguard founder Jack Bogle says data on share turnover show average holding periods for institutions are now less than five months. Since 13fs are filed 45 days following quarter-end, reporting periods are longer than holding periods!

But ownership data don’t mean what they did before rules the last 15 years transformed market structure. Let me drive that point home. Too much attention is paid to WHO, and not enough to WHY.

Trading “back in the day” was the means to the end. Today, trading IS the end. Nearly 85% of volume is the product of a trading objective, not investment. So complete trading data matter greatly now – and you don’t have them.

ModernIR provides great statistical measures of trading behavior because markets run on rules and math, and we can apply statistics to both. But why do public companies have incomplete data? The act creating the SEC says all constituents shall have equal treatment. (more…)