Tagged: Nasdaq

End Reg NMS

The structure of equity markets is like Lance Armstrong: Defining an industry but dogged by accusations.

The SEC seems to be in near-continuous investigative mode. Last week the Chicago branch of the nation’s central bank, the Federal Reserve, joined the cooks in the kitchen, including Congress, to huddle over the stove and study the stew.

Speaking of Congress, a bombshell detonated during market testimony last week. Bloomberg’s Nina Mehta wrote Sept 20 in an article titled “NYSE Executive Urges Assessment of 2007 Stock Trading Overhaul” that Joe Mecane, head of equities for the exchange, thinks the SEC should reconsider Regulation National Market System.

You’d expect shock. Thus far, no. But agreeing with Mecane were Nasdaq transaction services head Eric Noll and BATS chief operating officer Chris Isaacson. Rather than piecemeal reactionary remedies to yeasty glitches in trading markets, all three said, regulators should examine the extreme makeover given markets by Regulation National Market System.

SIDEBAR: Join us Friday 9/28 at 3p ET for a web meeting on using Rational Price to sort signal from noise – and to talk about Reg NMS and what issuers should do.

Amid a vast array of market minutia managed by provisions in its 500 pages, Regulation National Market System decreed that trades must meet at the “national best bid or offer.” To facilitate compliance, quotes under Reg NMS are only acknowledged if computerized. Thus, automated quotes have proliferated in continuous footraces to set stock prices. (more…)

Machinating Your News

For what struck me as a giant one-day life metaphor, I joined 2,500 other clinically insane individuals Sunday on Colorado’s hallowed cycling Triple Bypass (motto: “For Those Who Dare”).

Coursing from Avon to Evergreen over 123 miles and a triune set of towering climbs totaling more than 11,000 feet of elevation gain, the ride seared lungs and legs, testing the flesh with sweeping escarpments and breath-taking descents. Life’s highs and lows, triumphs and travails, rolled up and thrown aboard a road bike. I’ve crossed it off the list. Whew.

And daily deep in the bowels of Gigabit Ethernet connections, machines are performing triple bypass rides through your stock, feasting on economic data en route.

Taking but one example, the Nasdaq announced – fittingly on Friday the 13th – a machine-readable news service called Event-Driven Analytics. Created by RapiData, a firm the Nasdaq acquired this year, news is formatted so “latency-sensitive” traders can process it with algorithms that decide what and when to buy or sell.

Latency is a trading term that describes the pursuit of seamless and blistering speed. Those sensitive to it are like cyclists in a peloton, wheel to wheel at break-neck pace, who can be harmed by the slightest fluctuation. I saw that happen ahead of me Sunday as we raced over Dillon Dam near the Keystone ski resort at nearly 26mph. One rider made the slightest hesitation and the two trailing him collided and were down skidding over the pavement in a fraction of a second. They were okay but skinned, bloody and bruised. (more…)

Losing Facebook

What’s green and brown, and rolls? The terrain south of Santa Fe where we rode 103 miles on bikes Sunday, averaging 15.6 mph through 4,500 feet of climbing and insistent New Mexico winds. Icing: We saw the eclipse, glimpsed through a combination of my Droid and some passerby’s strip of roll-film. We were pleased.

Less pleased were buyers of Facebook shares. Another market-structure lesson, IR folks.

Remember the Infinite Monkey Theorem (now also a winery here in CO)? The notion was that infinite monkeys randomly clicking keys of infinite typewriters – dating the era from whence this theory arose – could reproduce our great literary works by accident.

Whether ‘twas to be or not, the Infinite Monkey Theorem tripped up trading at the Nasdaq in Facebook. With trades machinating through theoretically infinite combinations of data points, it was impossible for Nasdaq engineers to anticipate every erroneous outcome. Thus, hypothetical monkeys pounding figurative keys bumbled into an unanticipated event.

Part B. Confusion over who owned what when the music died shouts through a bullhorn at us about the way markets work. Most trades are intermediated using shares that, for lack of a better descriptor, are rented. The buying and selling is often (60%+) not real.

You’ve seen an auction, right? “Do I hear $42?” Somebody raises a finger, and the price of the thing up for auction becomes $42. Is that what the buyer pays? No. It’s a bid. (more…)

The Emperor’s ETF Clothes

If somebody tells you he has a plan to improve your financial condition by borrowing your credit card and buying himself a bunch of stuff with it, be suspicious.

With that setup, we have a story to tell you. In a minute.

First, we said last week: “Overall sentiment is surprisingly good in money behind client shares. Stocks may recover quickly.”

Spot on. It shows how data-analytics help us understand market behavior. But remember our qualifier: “The DXY dollar index shows the same fissures it had last summer when the Euro nearly came undone. This currency crisis is coming back in weeks or months.”

We stand by that. The Infinite Elasticity Theorem posited by central banks is about to snap. It goes like this: “In times of crisis, expand the supply of money until the problem disappears under a pile of paper, because we can’t handle the truth, so we don’t want you to either.”

To our story. The Nasdaq has asked the SEC to approve its Market Quality Program, in which sponsors of thinly traded (under 2m shares daily) Exchange Traded Funds would pay market makers to trade the ETFs. The Nasdaq says these payments will stimulate trading in the ETFs, thus narrowing spreads, making markets efficient, enhancing market confidence and integrity, and boosting volumes in issuer components of the ETFs. (more…)

Did You Carry the One?

Suppose the chairperson of the national central bank strode from the organization’s Gothic façade on Maiden Lane and said, “Job growth is likely temporary, and folks are going to have to borrow money and buy stuff just to keep the economy running like a used Yugo.”

How would you expect stocks to react? Exactly. They would soar, as they did Monday March 26.

Speaking of bizarro-world, if you missed the BATS Exchange IPO drama Friday, you must have been on a monastic sojourn in the hinterlands. It showed several things. You can run a great business. You can raise money from investors. You can be quality folks who are nice to boot, as our friends at BATS are.

But if somebody forgets to carry the one in that mathematical equation for the opening auction, the incredible shrinkage occurring in the dollar can immediately translate to your shares, speeded up to nanoseconds.

Humor aside, we were asked by various members of the media (and quoted by the WSJ Saturday for the lead article on page one) and many clients about BATS. Should you worry about trading markets because the IPO for a technology-driven stock exchange failed?

Not for that reason. BATS will be fine. They will be back, and soon. Mark it.

But something should concern you. We’ll come to it in a moment. (more…)

Be Vigilant

Good to see you folks in Boston last week. But I needed Denver to thaw me out. It was seventy here last Saturday. I washed the car in T-shirt and flip flops.

If at first you don’t succeed, try, try again. So it goes at the Nasdaq.

Last autumn the exchange proposed to charge small-cap companies fees of up to $100,000 to incentivize market-makers to trade small-cap ETFs, arguing to the SEC that it would infuse thinly traded securities with liquidity. The rule would have required the SEC, FINRA and the exchange itself to reverse longstanding prohibitions on paying market makers to trade securities. For certain exceptions only (of course, exchanges pay billions of dollars in rebates to “liquidity providers” each year).

The SEC promptly rejected the rule-filing. Now it’s back. See it here.

IR folks, do you know the adage about being wise as serpents but meek as doves? Question what you hear from exchanges that rely on data and transactions – not issuers – for revenue and profits. Take nothing at face value. Examine the facts. (more…)

Let’s Think of Something to Say

Happy New Year! If the holidays this year seemed sweeter, the air more welcome to the well-caroled note, it’s probably because I’ve been quiet for two straight weeks.

And with good reason. The lovely KQ and I winged southward with fellow wayfarers for time over the keel on the cayes and reefs of Belize. At Queens Cayes east off Placencia past the wildlife preserve at Laughing Bird Caye, we found what one friend called “your own Corona commercial.” As the sun faded toward dusk there, we caught this grand view of our boats on Dec 11. Our companions below the surface included this delightful fellow, a spotted eagle ray. The Eagle Ray Club is a good name for a rock band. (more…)

Outrage in the Dark

Observe. Orient. Decide. Act. OODA.

This is how Pipeline Trading describes its predictive analytics for helping buyside customers identify large-block trading opportunities.

For those of you who missed the news that rocked The Street this week, Pipeline, a dark pool, was fined $1 million by the SEC for misleading clients about the nature of its liquidity.

Were you harmed? Check to see if your shares trade at Pipeli—

Oh. You can’t. It’s a dark pool. You don’t know if your shares trade there unless Pipeline’s orders route to your listing exchange.

Of Pipeline, SEC Enforcement Director Robert Khuzami said in a statement: “Investors are entitled to accurate information as to how their trades are executed.”

Pipeline offers a platform where institutional customers like mutual funds can find “natural liquidity,” or real orders from other buysiders. What’s more, Pipeline provides execution algorithms that mimic how high-frequency traders try to project price and volume in order to place profitable trades ahead of moves. If the buyside can beat HFT at its own game, then instead of being victimized, it can also generate alpha – market-beating returns on trades. (more…)

IR Pros Must Know Macro Factors

We were sitting on the porch in the shadow of the American flag Sunday September 11 when fighter jets streaked and thundered so low that all of Denver shook. We caught glimpses of pairs of F-15s and F-16s, afterburners hot. Later, we read that warplanes from Denver escorted two flights with suspicious passengers aboard. But the ten-year memorial passed in peace.

Speaking of thunderous roar, I attended the jam-packed NIRI Rocky Mountain Chapter’s kickoff session today. Nasdaq chief economist Frank Hatheway offered a thoughtful and statistical look at the market. He joked that when he first prepared slides two weeks ago, the trends were improving but he’d had to change his comments to reflect reality.

Dr. Hatheway launched his talk by comparing stock indices with VIX volatility, Treasury yields, oil prices and gold. He observed that investor-relations professionals today need to develop a level of understanding of these “macro factors” – benchmarks of group behavior across asset classes (clients, we include a Macro Factors segment on page two of your Market Structure Report). (more…)

We’re back from NIRI National!

Orlando sweltered like you’d expect a swamp in central Florida in June might. We heard 1,300 were on hand, up triple digits from last year. There were new faces in the crowd and new vendor names, though big ones were absent too because exhibit costs go up while things like annual reports and total public companies decline.

We were tethered to the booth mostly but I sat in on the session about how equity markets work. Rich Barry from the NYSE, John Adam of Liquidnet, and Brian King at BATS paneled, and well. Our client Moriah Shilton at Tessera moderated like a pro.

The room was packed to standing-room-only. In the two years since I sat in Moriah’s seat on the stage, how markets work and what to do about them continues to populate the thoughts of IR folks, clearly. They streamed to the mics throughout with queries.

Karen and I nudged each other and shook our heads at this one: “How can we understand where our shares trade and for what reason?” (more…)