Tagged: Joe Saluzzi

Flying Machines

While France roasts on both the heat of the US women’s soccer strikers and mother nature’s summertime glow, in Steamboat Springs Lake Catamount sits alpine serene, and it was 46 degrees Fahrenheit (about the same read in Celsius in France) on our early bike ride yesterday.

In the USA, we join figurative thankful hands with you across the fruited plain to mark this amazing republic’s 243rd birthday.  Long may the stars and stripes fly.

What’s flying in markets are a bunch of machines.

Joe Saluzzi, one of our marquee panelists at the NIRI Annual Conference last month, spoke to IR Magazine on how the market works and why investor-relations professionals need to educate themselves. As Joe says, much of your volume isn’t investment but trading. It distorts perceptions of real supply and demand.

Why does that matter?  Because your board, your executive team, your investors, see your stock as a barometer of fundamentals. You need to know when that’s true – and when it’s not.  Misunderstanding what the market is doing can lead to big mistakes.

What if your stock declines sharply with results and management believes it has miscommunicated key messages (and blames you)?

Suppose market structure shows Active money bought in the preceding two weeks – because you’ve been talking regularly over the quarter about what you’re trying to do strategically. Then before the call, they stop buying to pay attention to what you say.

The absence of what had been present will be patently apparent to Fast Traders. They will sell and short you.  Whoosh! The flying machines take you down.

Every IRO should understand, and observe, and report internally to the executive team and the board, the starkly apparent data demonstrating these facts. We have that data. For anyone traded in US markets.  Including your peers. And yes, you can see that data.

Story is vital, sure.  But the way we think about the influence of story, fundamentals, strategy, should be predicated on facts, not a perception diverging from reality.

Illustratively, CNBC ran a headline last Saturday reading “80% of the stock market is now on autopilot.”  Referencing a JP Morgan client note, the reporter said about 60% of assets are in passive indexes and Exchange-Traded Funds (ETFs), with another 20% following systematic strategies.

An aside, I think Morningstar is behind the curve on measuring the pervasive and endemic shift to passive in stocks. It’s not just assets under management but the composition of volume.

A WSJ article (registration required) last December describing the “herdlike behavior of computerized trading” also quoted JP Morgan officials estimating that 85% of market volume was something other than Active investing.

Those of you using our analytics know we track the facts with precision. Currently, it’s 87%, with just 13% of market volume the past week from Active investment.

Does it render IR obsolete?  Of course not!  Stop thinking your job consists of talking to investors.

That’s part of the job, sure. But IR is a strategic management function. Your job is to know what all the money is doing, all the time, and communicate important facts about trends and drivers to the board and executives so they’ll have realistic expectations.

And your job is to manage the market for your shares, which includes sorting out what’s controllable and what’s not, and providing important metrics on equity health and drivers around news, earnings, and non-deal road shows – and on a regular basis, proactively, as all good business managers do.

That’s IR today. The market is not full of “noise.” It’s full of flying machines, amazing sensors feeding back vital data to observers like us, who in turn help you take command of the equity-market battlefield as trusted strategic advisor to your executive team.

Ponder that with a cold beer (or a cold Rose from Provence!) and a flag this holiday week.  Happy birthday, USA!

Crossfinding

We marked May’s end aboard a boat on the trade winds from Norman to Anegada in the archipelago of the British Virgin Islands. It’s an indisputable jewel of that empire upon which the sun once never set.

Now, back to reality!

“Arnuk and Saluzzi, the principals of Themis Trading, have done more than anyone to explain and publicize the predation in the new stock market.”

So writes Michael Lewis in his No. 1 New York Times bestseller Flash Boys, which rocked the US stock-market community. If you’re coming to NIRI National next week in Las Vegas, put this on your calendar:

I’m moderating a fireside chat with Joe Saluzzi (regular CNBC and Bloomberg TV guest, two 60 Minutes appearances about high-frequency trading) on Tuesday June 10 at 4:10p in Bellagio 2. Click here for details. Expect insight and entertainment – and bring hard questions!

Speaking of markets, did you see that Credit Suisse and Goldman Sachs released details about their dark pools? These are members-only trading venues regulated as broker-dealer Alternative Trading Systems under what’s called Reg ATS.

Credit Suisse’s Crossfinder is reputedly the world’s largest such market, which is in part due to the volume of orders that other brokers are routing to Credit Suisse. We monitor routing practices. It’s apparent to us that Credit Suisse leads in routing market-share.

Now, why do they lead? And why should you care, there in the IR chair? Because how the market for your shares functions is in the IR wheelhouse. Right? You know how your company sells products and services. How about the way your shares are bought and sold?

After all, the goal of IR boiled down to quintessence is to foster fair value in your shares and a well-informed marketplace. How do you know when that’s true?

One might say “when my shares reflect a certain multiple of the discounted present value of future cash flows.” But that measure is only true for investors measuring cash-flows. Eighty-five percent of your volume comes from forces motivated by something else.

You can’t control these but you can influence them, and measure them, and differentiate between when your active investors are setting price, and when something else is. To the degree that the prices of one are similar to the other, your market is fairly valued. It’s that simple, but you have to establish a way to measure it (we have).

Which leads back to Credit Suisse Crossfinder. In its Form ATS, the broker says it segments participants in its market into four groups.

Son of a gun. We segment the entire market into four groups, both in individual shares, and broadly, so we can see variances in these groups comparatively and by duration.

Credit Suisse calls the four groups Natural, Plus, Max and Opportunistic. The broker creates what it calls an “objective formula” predicated on a “variety of metrics” to “capture the trading behavior” of these clients.

Well. That’s exactly what we do. We think Credit Suisse is successful because it observes its clients’ behaviors and clusters similarities to improve outcomes for them. Logical stuff. I’m sure they know which behavior is dominating at any given time.

So do we, in the way we measure four behaviors ranging from natural to opportunistic. Now, why does this matter to IROs? For the same reasons. To improve behavioral outcomes. And because it’s how the market works. It’s how institutions are behaving.

I’ll probably fall short of instilling profundity, but this is on a magnitude of realizing that the earth you thought was flat is in fact round. It changes everything.

The holy grail of market intelligence isn’t knowing if Fidelity bought. It’s understanding whether the behavior of your dollar-flow is natural or opportunistic. That, my friends, is where the meaning lies.

Well, The Meaning may also be just off the coast of Virgin Gorda. Meanwhile, see you next week (booth 615) in Las Vegas!

Tapering Tantrum

EDITORIAL NOTE: We’re right now plying the azure waters off Richard Branson’s Necker Island. The following edition of the Market Structure Map ran May 29, 2013, ahead of last year’s NIRI National Conference (if you’re heading to NIRI in Las Vegas this year, don’t miss my fireside chat about Flash Boys and Broken Markets with famed HFT expert and frequent CNBC guest Joe Saluzzi of Themis Trading. More on that next week!). The Fed continues to be de facto captain of risk assets and the wind beneath their wings. It behooves us all in the IR profession to realize we’re in the process of undergoing separation anxiety. It just hasn’t manifested yet.

 

“If something cannot go on forever, it will stop.”

This witty dictum by Herb Stein, father of Ben Stein (yes, from Ferris Bueller’s Day Off, The Wonder Years, Win Ben Stein’s Money and TV in general), is called Stein’s Law. It elucidates why stocks and dollars have had such a cantankerous relationship since 2008.

Last Wednesday, May 22, Ben Bernanke told Congress that the Federal Reserve might consider “tapering” its monetary intervention called quantitative easing (QE) “sometime in the next several meetings.” You’d think someone had yelled fire in a crowded theater. The Nikkei, Japan’s 225-component equity index, plunged 7%, equal to a similar drop for the Dow Jones Industrial Average at current levels. On US markets, stocks reversed large gains and swooned.

Why do stocks sometimes react violently to “monetary policy,” what the heck is “monetary policy,” and why should IROs care?

Let’s take them in reverse order. Investor-relations professionals today must care about monetary policy because it’s the single largest factor – greater than your financial results – determining the value of your shares.

By definition, “monetary policy” is the pursuit of broad economic objectives by regulating the supply of currency and its cost, and generally driven by national central banks like the Federal Reserve in the United States.

Stay with me here. We’ll get soon to why equities can throw tantrums. (more…)

Bourbon Street Market

The equity market is like Bourbon Street.

No, we don’t mean the stock market is home to “Big Daddy’s World Famous Love Acts.” We mean it’s a bit off, a party, somewhat wanton, full of folks in disguise doing things they wouldn’t do anywhere else. Fantastical.

I interviewed Joe Saluzzi at the NIRI Southwest Regional Conference last week in New Orleans. Joe and co-founder Sal Arnuk at Themis Trading are the reason we all know about “high frequency trading.” Their white paper on toxic equity trading went viral in 2008, and the rest is history.

We sat down Charlie-Rose-style at the Hotel Monteleone and talked candidly about Joe’s new book, “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence.”

If you haven’t done so, buy it for yourself (I have it on my Kindle) and get a copy for your CFO or CEO. Everybody who at some time utters the word “equity” should read it.

If you’re in the IR chair, executives expect you to deliver a story to investors that advances shareholder value. You want a market that supports those efforts by helping risk-taking capital connect to the opportunity in your shares. Most executives generally conclude that it’s working. Stocks seem to be trading comparably to historical S&P 500 earnings multiples.

So why would Joe and Sal argue that markets are broken? (more…)

Knight Time

Some were forced to do it themselves.

In the wake of Knight Capital’s technology glitch – if you missed it, a linchpin in trading markets was nearly undone Aug 1 by faulty trading software – some brokers who normally route order flow to Knight for handling had to execute their own trades.

They’re not as good at it. No question. But a curious thing happened. We observed a measurable increase in share of market for rational money. More volume acted like rational investment the days following.

Why? How? Today, money often puts compliance before investment considerations. Say you’re a mid-tier broker-dealer whose client is a small Midwest municipal pension fund. The fund puts a modest percentage of resources into a trading portfolio and directs trades to you because your firm’s president golfs Fridays with the mayor.

Before we continue, breaking news: I’m in New Orleans next week to sit down with JOE SALUZZI, co-author of Broken Markets, for a candid chat on what ails markets today. I’m also moderating a wild brawl of a panel discussion on the hot topics in IR today. If you’re not in the Big Easy next week, well…you’re not where you should be.

Back to our story. Market rules require that you as a broker execute trades in something similar to the amount of time that Morgan Stanley does, which is hard to do without more risk to your firm’s capital base (meaning your money takes the other side of trades if nobody else is there). Face it. A family brokerage in Bloomington, IL, isn’t going to host its servers right next to the Nasdaq’s in Trumbull, CT, like Morgan Stanley. (more…)

Broken Markets

Our good friends Joe Saluzzi and Sal Arnuk, proprietors of Themis Trading and experts on market structure, have at last written a book about markets. They guest-blog today at the Market Structure Map.

We’re out this week Riding the Rockies from Gunnison to Fort Collins, covering 450 miles and some 25,000 feet on pedals and small seats. Assuming we survive it, we’ll tell you about it next week. Meantime, read this, and buy the book, Broken Markets. Every IRO, every executive, should read it.

Mark your calendars: Plan to attend the NIRI Southwest Regional Conference Aug 15-17 in New Orleans. I’ll be there, where I’ll interview Joe Saluzzi on the state of modern markets.

Now, Joe and Sal:

Trust and confidence in the stock market has been shattered in the past few years.

Events like the May 2010 Flash Crash, the failed BATS IPO and the Facebook fiasco have frustrated investors, leaving them wondering “what the heck is going on?”

In response, they have pulled their money out of domestic equity mutual funds week after week.

Since the Flash Crash, nearly $300 billion has been withdrawn from domestic equity mutual funds, according to the latest report from the Investment Company Institute. (more…)

Public Companies, Pay Your Market-Makers

 Apparently, exchanges are not bastions of deep liquidity.

 In a bombshell dropped at a congressional hearing yesterday, top executives for the NYSE and the Nasdaq proposed – to borrow from humorist Dave Barry, we SWEAR we are not making this up – that you pay them fees, small-cap companies, which they will distribute to market-makers to incentivize trading in ETFs that trade your shares.

 Exchanges already incentivize most trades, but in the hundred most liquid names there’s great profit in the data off the consolidated tape. You small-caps offer no profit. So in addition to charging you listing fees, they now want to charge you market-making fees – but in the ETFs that hold your stocks.

 Congresspersons unfamiliar with how arbitrage works and how ETFs are principally one-day investment vehicles won’t see through this self-serving and patently ridiculous proposal. The SEC may also overlook the glaring contradiction to well-functioning capital markets and approve it. Public companies don’t read exchange proposals as they should and don’t comment on them.  No opposition? Approved.

 For more, we’ve asked permission to re-run a blog post today by Joe Saluzzi at Themis Trading: (more…)

Pay Attention to Your Trading

We’re leaving most of this week’s email to our friend Joe Saluzzi at Themis Trading. Joe is a groundbreaking and thoughtful critic of contemporary trading, and among the smartest people we know. Last October, Steve Kroft interviewed Joe on 60 Minutes about our machine-driven markets.

Read what Joe says below about the recent Nasdaq website security issue. Even if you trade elsewhere. You all trade everywhere today. Do you know how much of your volume trades on your listing exchange?

How about your volume at other venues? The brokers executing these trades? The smallest investor trading just 100 shares can know whether a trade is executed on an agency or principal basis. But public companies don’t even know the brokers behind the majority of trades.

How about your daily short volume? Exchanges are currently implementing circuit breakers on short trades as required under SEC amendments to Reg SHO. But public companies don’t even know what part of their daily volume is short. (more…)

Boy, when it rains, it pours. Three years ago when we began grousing about how Reg NMS was turning equity trading into a foot race, people thought we’d been hitting the Hookah. Now it’s on 60 Minutes.

Along with Larry Leibowitz from the NYSE and Minoj Narang of Tradeworx, 60 Minutes interviewed Joe Saluzzi from Themis Trading (read their white papers about trading). Joe was on my panel about modern trading at NIRI National in 2009. Few people are better at explaining the peccadilloes of a market structure based on price and speed.

Here again is the problem, simplified to its most basic elements: Trades must meet at the best bid or offer. The participants able to get to the price fastest will always set the price. And because the exchanges and regulators alike have embraced a “maker/taker” model in place of the old auction and automated quotation systems, transient money is always setting your price. Yes, it requires the presence of something else underneath it, as the Flash Crash illustrated. But the structure, not the behavior, is the problem. The behavior is precisely what one would expect from the existing structure. (more…)