Tagged: decimalization

Market Electrolysis

Have you seen those Pure Michigan ads? Compelling. Summer in Colorado could be a brand too, as these views of Hanging Lake near Glenwood Springs and Vail at morning last week attest. We seize every chance to savor the high country.

Speaking of chance, high-frequency trading (HFT) is back in the news. When you read about HFT in the financial press, it refers to stock orders from proprietary traders (firms using their own money rather than executing orders for customers) using powerful machines to trade in fractions of seconds.

But that description propagates an incorrect perception of what’s happening. It’s a vision of anonymous and rapacious rapscallions hiding behind banks of computers and cackling evilly while out-sprinting hapless investors from trade to trade, looting financial markets.

The truth is simpler and less execrable. Investor relations pros, you need to understand not just what HFT is, but why it exists and what’s both good and bad about it.

I was just reading a blog post by John Tamny extolling the virtues of HFT. Mr. Tamny is a regular commentator on TV financial programs, a free-market kind of guy. I routinely encounter folks opposed to “banning” HFT because it’s free-market behavior. (more…)

Understanding Markets

You’ve heard that bit of cowboy wisdom on how to double your money? Fold it over and put it back in your pocket.

I hear folks wanting cowboy wisdom on market structure. What do I need to grasp? In that sense, this could be the most important Market Structure Map I’ve ever written.

If you’re at home, get a glass of wine. We won’t belabor the story, but it’s not a simple one. In the beginning, in 1792, when 24 brokers clustered under a New York buttonwood tree and agreed to give each other preference and charge a minimum commission, trading securities was simple. That became the New York Stock Exchange. Most trades were for investing, some few for speculating. People have been gambling since the Garden of Eden, obviously.

Step forward. In the 1860s ticker tape by Morse code sped markets up but didn’t change structure. In the 1930s, the Securities Act formed the SEC and imposed a regulatory framework. Structure remained similar, if more process-driven.

Take another step. When Benjamin Graham wrote “The Intelligent Investor” in 1949 (Warren Buffett called it the best book about investing ever written), he said to first distinguish investing from speculating. Seek safety for principal and an adequate return, through research in business-like fashion to find good businesses at a discount to intrinsic value. Own them for the long term. Graham separated this “active” investment from cautious and generalized passive investment. (more…)

Spread Too Thin

What if?

Those two words branded with a question mark may rank 2nd all-time behind “what is the meaning of life?”

What if…public companies could set spreads in their own trades?

Before we ponder that, let’s tip hats to IROs Moriah Shilton at Tessera Technology (TSRA) and Kate Scolnick at Seagate (STX), who demonstrated such adroit command of market structure in yesterday’s NIRI webinar on why trading matters in the IR chair (replay available for NIRI members). Expertise like theirs is the future of our profession. Knowledge, as always and ever, is power.

Speaking of knowledge, the SEC yesterday convened a round table on price-spreads in trading, commonly known as “tick-size.” On the panels were finance professors, representatives from major exchanges, venture capitalists, folks from Fidelity and Invesco – and thankfully, David Weild at Grant Thornton/Capital Markets Advisory Partners, and Pat Healy from Issuer Advisory Group, both strong advocates for the interests of public companies.

But there wasn’t a CEO, CFO or IRO from a public company (Moriah Shilton and Kate Scolnick should be on these panels!).

Here’s the issue. Ever since increments between the best prices to buy and sell shares were set by law in 2001 with Decimalization, trading volume has exploded but ranks of public companies and broker-dealers have fallen. In 1997, there were 7,500 public companies. Today there are 3,700 in the National Market System.

At the time, a belief prevailed that small investors couldn’t get a fair shake because brokers and specialists controlled prices in stock markets. So the SEC mandated that prices be set in penny increments. No more trading in eighths or sixteenths of a dollar.

In 1983 there were roughly 450 IPOs in the USA. Thirteen years later in 1996, about 700. The last year US markets remotely approached “hundreds” of IPOs – and thus, hundreds of IR jobs – was in 2000, right before Decimalization. (more…)