Tagged: Institutional Investment

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.

Risk-Free Return

Everybody is talking about the weather. Why doesn’t somebody do something?

This witticism on human futility is often attributed to Mark Twain but traces to Twain’s friend and collaborator Charles Dudley Warner. A century later, it’s still funny.

There’s a lot of hand-wringing going on about interest rates, which from the IR chair may seem irrelevant until you consider that your equity cost of capital cannot be calculated without knowing the risk-free rate.

That and a piece in Institutional Investor Magazine some weeks back brought to my view by alert reader Pam Murphy got me thinking about how investors are behaving – which hits closer to investor-relations than anything.

When I say hands are wrung about rates, I mean will they go up? We’ve not had normalized costs of capital since…hm, good question. Go to treasurydirect.gov and check rates for I-Bonds, the federal-government savings coupon. I-Bonds pay a combination of a fixed rate plus an inflation adjustment. Guess what the fixed rate is? 0.00%. The inflation-adjusted return May-Oct 2013 is 1.18%.EE-Bonds with no inflation adjustment yield 0.20% annually. This is a 20-year maturity instrument. Prior to 1995, these bonds averaged ten-year maturities and never paid less than 4% annually, often over 7%. If the I-Bond pegs inflation at 1.18% every six months, translating to 2.36% annually, is the risk-free rate of return a -2.16%? (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…)

JP Morgan and Market Structure

Karen and I will join the ghost of Billy the Kid and about 3,000 cyclists in New Mexico next weekend for the Santa Fe Century. Weather looks good, winds below gale force. Should be fun!

Speaking of gales, JP Morgan blew one through markets. So many have opined that I balk at compounding the cacophony. My own mother is throwing around the acronym “JPM” in emails.

But there’s something you should understand about JPM and market structure, IR folks. First, put this on your calendar at NIRI National next month: EMC’s global head of IR, Tony Takazawa, is moderating a panel Monday June 4, at 4:15p, on IR Targeting and Investor Trading Behaviors (scroll down to it). The aim: Understand how markets have changed, how institutions have adapted, and what that means to gaining buyside interest today. I’ll be there, and we hope you will be.

Back to JP Morgan. You could define “market structure” in many ways. We prefer “the behavior of money behind price and volume.” What’s JPM got to do with that?

A lot. We observed in the days before word broke about trading woes at the big custodian for Fannie and Freddie that its program-trading volumes in equities were down by wide margins across the market-cap spectrum. It disappeared entirely from some small-cap clients that it typically trades algorithmically with great consistency (indexes, models, ETFs).

These facts raised no particular red flag because we saw widespread discordance in program-trading last week. Then word of JPM’s whale of a London loss broke. Maybe it was coincidental that its program-trading volumes fell. Regardless, it demonstrates the interconnected nature of markets today. Missteps in the risk-management arm of a bank can blight program-trading in health care, technology and other equities. (more…)

We were on the bikes at dawn in Denver where on the oval at Washington Park it was 45 degrees as the sun rose.  That’ll wake you up!

Speaking of waking up, did you read Sebastian Mallaby’s article in the weekend Wall Street Journal called “Learning to Love Hedge Funds?” Going back to the first hedge fund in 1949, run by Alfred Jones, Mallaby contends that hedge funds represent the optimal risk-management model.  Government tries to prevent bad things from happening. Hedge funds, where owners put their money at risk and earn returns when profits are produced, view risk as a pathway to opportunity, but one marked by prudent insurance, or hedges, against downside.  Jones produced cumulative returns of 5,000% from 1949-1968, Mallaby notes. (more…)