Tagged: Corporate Earnings

Who Is Selling

“Who’s selling?”

It was 2001. I’d look up and there’d be the CEO leaning in the door of my office. This was back when my buns rode the gilded surface of the IR chair. I’d look at my computer screen and our shares would be down a percent or so.

“Somebody, apparently,” I’d say. “Let me make a few calls.”

Today we have Facebook, Twitter, Pandora, iPhones, and Tesla. None of these existed in 2001. The Intercontinental Exchange, formed a year earlier to trade derivatives, now owns the NYSE. What’s remarkable to me is that against this technological wave many issuers, not counting the growing horde with Market Structure Analytics, are still making calls to get answers.

Why wouldn’t everybody be modeling market behavior and measuring periodic change? But that’s another story.

So. What if nobody’s selling and your price is down?

Impossible, you say. For price to decline, somebody has to sell.

Let me tell you about two clients releasing earnings last week.

But first, say I’m a high-frequency trader and you’re reporting. I rent (borrow) 500 shares of stock trading at $25 apiece. Say the pre-open futures are negative. At the open, I explode ahead of all others by three microseconds to place a market order to sell 500 shares. My order plunges the market 8%. I immediately cover. And for the next six hours I and my HFT compatriots trade those 500 shares amongst ourselves 23,000 times. That’s volume of 11.5 million shares.

The huge move in price prompts swaps counterparties holding insurance policies for Blackrock and Vanguard into the market, spawning big block volumes of another 6 million shares. Now you’ve traded 17.5 million shares and your price, after dropping 8%, recovers back 3% to close down 5% on the day.

So who’s selling? Technically I, an HFT firm, sold 500 shares short at the open. I probably paid a $200 finance fee for them in my margin account.

You’re the IRO. You call your exchange for answers. They see the block data, the big volumes, and conclude, yup, you had some big-time selling. Conventional wisdom says price moves, massive volume, block trades – that’s institutional.

You’re getting calls from your holders saying, “What’s going on? I didn’t think the numbers looked bad.”

Your CEO is drumming fingers on your door and grousing, “Who the HELL is selling?!”

Your Surveillance firm says UBS and Wedbush were moving big volumes. They’re trying to see if there are any clearing-relationship ties to potential institutional sellers.

The truth is neither active nor passive investors had much to do with pressure or volume, save that counterparties for passive holders had to cover exposure, helping price off lows.

Those clients I mentioned? One saw shares drop 9% day-over-day. In the data, HFT was up 170% day-over-day as price-setter, and indexes/ETFs rose 5.3%. Nothing else was up. Active investment was down. Thus, mild passive growth-selling and huge HFT hammered price. Those shares are already back in line with fair value because the selling was no more real than my 500-share example above (but the damage is done and the data are now in the historical set, affecting future algorithmic trades).

In the other case, investors were strong buyers days before results. On earnings, active investment dropped 15%, passive investment, 8%, and HFT soared 191%. These shares also coincidentally dropped 9% (programmers of algorithms know limit up/down triggers could kill their trading strategies if the move is 10% at once).

They’re still down. Active money hasn’t come back. But it’s not selling. And now we’re seeing headlines in the news string from law firms “investigating” the company for potentially misleading investors. Investors didn’t react except to stop buying.

This is the difference between calling somebody and using data models. Don’t fall in love with models (this is not a critique of Tom Brady, mind you). But the prudent IRO today uses Market Structure Analytics.

Macro IR

We’re a day late this week in deference to an important birthday yesterday. After 236 years, there are lines and age spots but the countenance still juts, resolute.

Do people send you group emails sometimes with those images where if you stare at them, suddenly you see something else? Here are two verbal versions, headlines I saw Tuesday:

“European stocks rallied for a third day as hope mounted that central banks in Europe and the U.S. will act to bolster economic growth.”

“U.S. stocks extended a rally for a third day on Tuesday as sharp gains in oil prices lifted energy shares and traders factored in increased expectations for central bank stimulus.”

Do you see what’s freakishly wrong with these? Stocks rose despite conditions that should depress stocks. Because central banks might offer free money.

Markets have always been barometers of economic health. Now they’re moving on money alone, disaffected from the factors that once could be relied upon like the piers and stanchions of a venerable republic.

IR folks, think about this. It cuts to the quick of the job. We’re heading into earnings season. We’re planning call scripts and press releases. We’re thinking about discussion and analysis for quarterly filings.

Yet the markets we use as a mirror for the value of these efforts are doing the exact opposite of what they have always done. They are valuing supplies of currency rather than its commercial use. (more…)

The 11.1% Occupying Earnings

The One Percent is a catchy phrase. But statistics highlight the 11.1%.

It’s earnings season. Fifty-seven percent of our clients have reported, our data show. In the past five days across the Nasdaq segment, rational investment activity – which means what you think it means – was 11.1% of volume.

Translating, just over one of ten trades in Nasdaq-listed companies (the NYSE was better but could flip-flop next week) resulted from active investment. Statistically, 88.9% of volume – not as cool as 99% but we report what the data show – was driven by something besides thoughtful investment.

Did your stock behave as you expected when you reported?

Our first client to report plunged through hedges and closed down 13%, and we hadn’t hit options expirations (Apr 18-20). A host of clients with calls before Apr 20 beat expectations and gave solid guidance. Half closed up; the other half, down.

Do the 11.1% matter? Unequivocally. So do the 88.9%. I’ll give you examples. A small-cap tech company last week closed down 6% on a miss and weak guidance, but data showed shares trading in what we call the “Midrange,” meaning money had mixed reactions. The stock’s up now.

Wait a minute, you say. How can money have mixed reactions to a miss? A lot of money doesn’t value shares on multiples alone. Any more than world markets peg the US dollar to its redemption value from the US Treasury (zero).

Shares have relative value, and speculative value. Relative value means “what’s this stock worth compared to alternatives in the group or market?” Speculative value means “will this stock help me net a profit in a portfolio of things that fluctuate?” Good answers to both questions can mean stocks rise on – or right after – misses. (more…)

I read this at an Occupy Wall Street site:

“Let me tell you a wonderful old joke from communist times. A guy was sent from East Germany to work in Siberia. He knew his mail would be read by censors. So he told his friends: Let’s establish a code. If the letter you get from me is written in blue ink, it is true what I said. If it is written in red ink, it is false. After a month his friends get a first letter. Everything is in blue. It says, this letter: everything is wonderful here. Stores are full of good food. Movie theaters show good films from the West. Apartments are large and luxurious. The only thing you cannot buy is red ink.”

Great joke. No doubt scrutinizing your trading data to make sense of it is like something written in red, the code for which is blue.

Speaking of which, chances are, your earnings date is approaching. Your intraday volatility (spreads between high and low prices) is perhaps 4%. Across our client base, it’s now over 4% on average. To help you make sense of your stock price, the exchanges and designated market makers and surveillance firms are giving you columns of data on trading by different brokers and sector or economic news. They tell you so-and-so upgraded the sector, causing a strong rally.

You’re not sure. In your gut you think the euro has got a lot to do with it. Maybe the dollar. It would be nice to know. And it would help if you could assess how money will react to the news you announce next week or the week after. (more…)