Tagged: Market Structure Analytics

Two Pillars

I hit a nerve.

What sparked the tempest was my assertion last week that investor-relations professionals can’t be just storytellers when over 80% of trading is not Active investment.  (For you investors, it’s why stock-picking is performance-challenged.)

It’s not that respondents raged against the machines of the markets, or at me. Folks just wondered what to do instead.

A good friend and respected veteran in communications prodded me.  “You need to be specific,” he said. “You do a good job explaining the market, but don’t fade to generalities at the finish.”

I’m paraphrasing. In my mind, I’m clear. Perhaps on paper I’ve been less so. I conceded that he must be correct. So as the new year begins with the prospect of blessings, here are two firm principles for IR:

Rule No. 1: Build a diverse palette of institutional relationships strategically, then consistently match product to consumer tactically.

The market at some point will treat your shares, which are a product, in a manner that departs from the story you tell to support them. Broaden the audience.

Investors, think about this from a stock-picking perspective. You can select companies with great fundamentals but if Asset Allocation models don’t like them, expect the stocks to lag.

And yes, it’s possible to know what kind of money moves into and out of which stocks or sectors. We do it every day. We’ll come to that with some real examples.

Now match product to consumer, which is good relationship-management. Make this tactic a simple weekly action. We lay out a plan for you. It turns on metrics.

Nordstrom doesn’t randomly call people when the new Eton shirts are in, or whatever. They know which customers buy those shirts because they measure and track behavioral data. IR should too, and can.

Say you’re a growth story. But your shares are falling. The data show it’s Fast Traders shorting your shares, not investors selling. You can only affect active money, but get specific. Call the kind that likes Eton shirts. Deep-value high-turn hedge funds.

Every IR team should build (strategy) three or four such relationships. Tactically follow up only when your product matches. Help them achieve their investment objectives. They’ll help your shares recover so you’re a growth stock matching story.

Rule No. 2:  Measure the kind of money setting price, and make it part of management’s thinking (which takes persistence).

We’ve made it simple with six key metrics. The stock market is not a single monetary demographic, and it’s not long-term. Facts. Not threats to IR.

Copernicus said the earth was orbiting the sun, not the other way around. People wanted to go on doing what they always had.  Help your management team adapt to the real world. Yes, they’ll resist. Don’t let them revert to incorrect practices.

Example: A health care company has for the last five of seven weeks had Fast Trading as the leading price-setter, and short volume is consistently 65%.  Price reverts repeatedly.

The IR professional should tell management so executives won’t waste money on trying to reach more investors or blame IR for communicating ineffectually.

The data say investors are not responsible. Sure, the team might pick relationships to call that buy Eton shirts – aggressive, able to take risks in trading ranges.  But high short volume signals investors prefer renting shares out to investing more money in them.

The vital action item here is to set realistic expectations for management – perhaps flat tell them that the story and strategy need adjustment if investors are to engage again.  That’s powerful. And cost-effective.

A big client did a massive deal. For months the data showed investors hated it. No matter what they said with their lips, their money was not setting prices. The team tracked data and tweaked message and finally behavior changed. The deal closed. Powerful data.

Another client tracked investor-engagement for a year through a short attack and industry disfavor but ended with Superb investor-engagement using our measure called Gamma.  Awesome success metric.

Another had become a momentum growth stock without a momentum growth story, thanks to industry expectations. Data showed the dilemma ahead of a call that would likely recalibrate expectations. It showed big downside risk. But the transition out by growth money and the point where value investors set price were measurable, helping the IR team consistently inform management despite a painful reset to price.

The most important effort in any management discipline is understanding how the ecosystem functions. It’s impossible to make good decisions by guessing.  IR is a product manager.

There are two pillars to great IR in the 21st century. Build and manage diverse institutional relationships, matching product to consumer. Measure the data, understand the behavior setting price, and communicate it to management relentlessly.

You can’t run a truly 21st century IR program without knowing what kind of money is setting your price.  And why would you?  I didn’t say you can’t run a program. But it’s that vital, essential.

You can know what sets price. You can see how money changes over time.  You can use it to run your IR program efficiently and proactively (it’s our plan to bring behavioral analytics to investors in 2017 too). And you can look cool and feel less stressed.

That’s a darned good 2017 strategy, resting on big pillars.

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…)

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!

Autocallable

It’s time we had The Talk.

Candid discussions can be uncomfortable. They broach subjects we prefer to avoid. But we can’t ignore the facts of life.

One such fact is Contingent Absolute Return Autocallable Optimization Securities. We’re more comfortable talking about diarrhea, right? Bring them up at a party and the crowd disperses. Try talking to your teenager about them and she’ll roll her eyes and turn up One Direction in her ear buds.

Why the public disdain? Look at the name. Need we say more? They’re wildly popular though with issuing banks including JP Morgan, UBS, Barclays, Morgan Stanley, RBC and others – just about anyone who offers “structured products.”

This particular version of structured product (“a financial instrument crafted by a brokerage to achieve a particular investment objective for clients ranging from short-term yield to long-term risk-mitigation” is how we’d describe them) achieved both infamy and scrutiny after Apple shares slumped in latter 2012. Big banks had sold hundreds of millions of dollars of Contingent Autocallable Securities paying a yield of about 10% and tied to the performance of Apple shares. Buyers got stuck with shares that had dropped 30% in value and lost principal to boot.

I’ll give you my simplest understanding of how these instruments work and why you should care from the IR chair. It’s a debt instrument and it’s unsecured. It tends to pay high interest, like 10% annualized in a basis-points world. Whether it pays out turns on two things: How long you hold it, and whether the underlying equity to which it’s paired declines below a trigger price.

There are two problems for IROs. First, because regulators consider it debt, if it “converts” there’s no equity trade. These things are not responsible for big percentages of volume so there’s no vortex looming in your share-counts. But still, decisions and strategies impacting shares are resulting from instruments you can’t track. (more…)

Sun and Goggles

Mayday!

That’s the word quarterback Peyton Manning should’ve used Sunday, instead of Omaha! But we congratulate Coach Pete Carroll, a gentleman, and his bruisers from the Puget Sound.

Speaking of bruising, earnings season and macro factors collided like particles in an accelerator as January slopped into February. With just 58% of our client base reporting thus far, it could be premature to deconstruct it. But I know the question burns in IR minds: Can we understand what’s going on?

People sequenced the human genome. We can measure variance in light as finite as a flashlight blinking…on the moon. We can create money from nothing. Surely we can map market behaviors.

I was skiing in Steamboat last week during a whiteout. It was though I was floating. I had no clear sense of where the slope was until I carved, and I could not gauge my speed until I turned. Powder is forgiving so I wasn’t worried.

But this is how the market seems many times, right? It’s amorphous. There’s no definition to movement. No clarity.

The next day in Steamboat, the sun shone brightly and with goggles suited to light, fresh powder took on the rich and textured characteristics of a Wayne Thiebaud painting. Slopes were luxuriant and vivid.

There are two pillars to market movements, like bright light and the right goggles. I’m not suggesting one can perfectly matrix outcomes. But core principles can be observed.

Remember: We said the market reached a statistical top in our behavioral data on Dec 27. We then warned that if institutions shifted from equities with options-expirations Jan 16-22, the first shoe to drop would be Jan 23-24.

That happened.

In the days since we’ve warned that Shoe No. 2 of a process of retrenching from equities and shoring up institutional risk-hedges could occur during January window-dressing, which would mean Feb 3-4 could be ugly.

That happened.

Markets reached a statistical market bottom, behaviorally, on Feb 3. The same sentiment-reading registered in our data-analytics roughly June 28, 2013, and again about Aug 11, 2013, the last two times data indicated market bottoms (markets then rebounded).

(Warning: This time could be different. We’ve never massively removed central-bank support from global risk assets before.).

You must cease viewing the market as just investment and instead see it as risk-management and data. These are the pillars. One is sun, the other goggles. If risk managers shift resources in asset classes, it will impact trading data that machines consume, because movements depend on mathematical models now. (more…)

The Answer

If you won the lottery, what would you do?

What about the IR lottery? If you could have anything you wanted, know any detail, command any price, possess every tool, what would you most wish for in the IR chair?

It’s a darned good corporate gig, as corporate gigs go. You could say, “I’d like to be CEO.” That’s a fine aspiration and I hope we see more folks move from the IR chair to the head of the boardroom table. About the only thing the IR department wants for – given how strapped it generally is for staff – is time managing people. But it covers every other thing, from operations, to strategy, to financial performance.

Would it be better targeting tools? I’m long removed from the grunt work of building the shareholder base, but I’ve done it. Story and audience – investment thesis and shareholder profile – never go out of style. If you could have the best targeting list, so good the Justice Department would subpoena it if you were a news reporter…well, that would be nice.

How about the skills for writing the perfect earnings release? Say you could hire some great writers. Merge the alkaline prose of Cormac McCarthy with the verve and sass of Jim Harrison and the poignant pacing of Alice Sebold. Your press release would be the talk of Wall Street. No Country for Old Men, The Great Leader, and Lucky, rolled up with financial statements and a GAAP reconciliation. Analysts would hang on your every perfectly turned phrase. (more…)

Market Structure Matters

“I get out and meet investors. Tell the story. The rest is noise.”

That’s what an IRO I’ve known since the 1990s said last week over a web meeting about Market Structure Analytics.

Speaking of which, we’ll be discussing this notion with two investor-relations officers who make Market Structure part of complete and exciting IR programs at IR Magazine’s West Coast Think Tank April 4 in Palo Alto. Space is limited. If you want to join our conclave, email me for an invitation.

There are three big reasons why telling the story and ignoring the market is a bad idea. First, anybody can do that (I know – I used to do it!). It’s IR measured by setting meetings, which is like monitoring the success of an advertising campaign by counting the ads you’ve run. It’s clerical.

IR is not a clerical function. It’s not about setting meetings. It’s a strategic effort with direct implication to the reason your business exists: To deliver shareholder value. As I once contended with my CFO when I was in the IR chair, if we’re not willing to spend the price of one non-deal road show on tools to measure what we’re doing, then why are we doing it? (I got the tool, by the way, but it didn’t do what we needed…and that’s why Market Structure Analytics exist today).

A decade ago when I was an IRO, rules were swiftly swinging into place that now have transformed trading. Enron and Worldcom and Elliott Spitzer’s contention that research and trading should be separated and an SEC decision to replace vibrant and unimpeded commerce with a National Market System were just flaring like dust devils in plowed Midwest fields. Fundamental investment hadn’t yet been routed from public markets to private equity by the Indy Racing version of equity-trading, and a majority of volume still had bottom-up roots. (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…)

You Never Know

An ode to erudition in professional sports, these pearls of wisdom overheard on sidelines come thanks to ESPN’s halftime report during the unfortunate demise of our Denver Broncos in Monday Night Football:

“If you hadn’ta been where you was, and did what you did, we wouldn’ta got what we got.”

“You can sum it up in one word: You never know.”

“You never know” is a good way to describe markets. And reason why market-structure analytics are essential to IR. Paul Rowady at TABB Group, the top market-structure authority today, wrote extraordinary commentary at TABB Forum yesterday saying monetary intervention by central banks poisons market data.

What’s the real price of your stock? As you ponder, Rowady says, “At any moment in time, one could argue that there simply cannot be true price discovery in any market where intervention occurs – which is most of them.”

Why? Because central banks, unlike the rest of us participants, can use unlimited money and unrestrained access to information – the Federal Reserve is not bound by “insider trading” constraints like you – to affect prices of every asset, every commodity, every currency. (more…)

Big Tick Talk

We all love soaring markets. When were you last dead sure what drove your stock up?

Today, a German court will decide if German taxpayers must back last week’s European Central Bank plan to buy Eurozone debt, which powered US equities to multi-year highs Sept 6. Stocks have moved higher since, with the dollar at May lows. What that court says may prompt stocks to swoop or swoon.

Thursday the 13th, Ben Bernanke speaks after the Federal Reserve’s monthly Open Market Committee meeting. That may boost stocks too, or disappoint them.

By the way, Friday I speak (having zero macro impact) to the IR council for MAPI, the manufacturer’s alliance, on “what lies beneath” market structure today. See you at the Intercontinental in Chicago.

Next week is huge. Options expire, quarterly rebalances to S&P indexes take place, and important European bond auctions go off – all between Sept 19-21. Correlation between the US dollar index and the S&P 500 is nearly symmetrical to late April’s when we warned clients of an imminent market retreat. Stocks then declined a thousand points over several weeks until the dollar in July began its longest slide since the Flash Crash. Beware risks.

In the data, evidence abounds. We’ve seen stocks curiously leap ex-dividend, whole peer groups shoot up 15%, and random shares move double digits up or down in two days without regard to the market or the peer group. Global statistical arbitrage – using math to calculate trading spreads globally – is rampant in behaviors, including the normally “rational” slice. As high as we’ve ever seen. (more…)