Tagged: NIRI

A Big Deal

Tim, I’m listening,” said this conference attendee, “and I’m wondering if I made the wrong career choice.” He said, “Am I going to be a compliance officer?”

We were in Boston, Karen and I, marking our wedding anniversary where the romance began: at a NIRI conference, this one on investor-relations fundamentals for newbies. I was covering market structure – the behavior of money behind price and volume – and what’s necessary to know today in IR (it wouldn’t hurt investors to know too).

It prompts reflection. The National Investor Relations Institute’s program on the fundamentals of IR that Karen and I both attended over a decade ago differed tectonically. Then, most of the money in the market was fundamental.

Companies prided themselves on closing the books fast each quarter and reporting results when peers did – or quicker.  I remember Tim Koogle hosting thousands on the Yahoo! earnings call about a week after quarter-end, the company setting a torrid pace wrapping financial results and reporting them.

Most of the money was buying results, not gambling on expectations versus outcomes. There were no high-frequency traders, no dark pools, limited derivatives arbitrage, no hint yet that passive investment using a model to track averages instead of paying humans to find better companies would be a big deal.

I’ve over these many years moved from student to faculty. I had just described the stock market today for a professional crop preparing to take IR reins, no doubt among it those who years from now will be the teachers.

I explained that the stock market possesses curious and unique characteristics. When you go to the grocery store and buy, say, a bag of spinach, you suppose the price on it is the same you’ll pay at the cash register. Imagine instead at the checkout stand the price you thought you were paying was not the same you were getting charged.

Go another step further. You had to buy it by the leaf, and someone jumped ahead of you and handed you each leaf, charging a small fee for every one.

That’s the stock market now. There is always by law a spread between the bid to buy and offer to sell, and every interaction is intermediated so regulators have a transaction trail.

I explained to the startled attendees unaware that their shares were priced this way that in my town, Denver, real estate is hot. Prices keep rising. People list houses for sale – call it the best offer to sell – and someone will offer a higher price than asked.

In the stock market today, unlike when I began in the profession, it’s against the law for anyone to bid to buy your shares for a price greater than the best offer. That’s a crossed market. Nor can the prices be the same. That’s a locked market. Verboten.

So in this market, I said, trillion of dollars have shifted from trying to find the best products in the grocery store to tracking average prices for everything. This is what indexes and exchange-traded funds do – they track the averages.

By following averages and cutting out cost associated with researching which things in the grocery store are best, money trying to be average is outperforming investors trying to buy superior products. So it’s mushroomed.

And, I said, you can’t convince the mathematical models tracking the averages to include you.  You can only influence them with governance – how you comply with all the rules burdening public companies these days, even as money is ignoring fundamental performance and choose average prices.

That’s when the question came.  See the first paragraph.

I said, “I’m glad you asked.”  Karen says I need to talk less about the problems in our profession and more about the opportunities.  Here was a chance.

“It’s the greatest time in history to be in our profession,” I said.

Here’s why. Then, we championed story, a communications job. Today IR is a true management function because money buying story is only a small part of volume. IR demands data and analytics and proactive reporting to the management and Board of Directors so they recognize that the market is driven as much by setting prices as it is by financial results.

There are $11.5 trillion of assets at Blackrock, Vanguard and State Street alone ignoring earnings calls and – importantly – the sellside.  IR courts investors and the sellside.

It’s time to expand the role beyond the message. Periods of tectonic change offer sweeping professional opportunity. Investors should think the same way: How does the market work, who succeeds in it and why, and is that helpful to our interests?

IR gets to answer that question.  It’s a big deal.  Welcome to the new IR.

Mercenary Prices

Florida reminded us of high-speed traders.  I’ll explain.

An energized audience and the best attendance since 2012 marked NIRI National, the investor-relations annual confab held last week, this year in Orlando.

We spent the whole conference in the spacious and biggest-ever ModernIR booth right at the gateway and in late-night revelry with friends, clients and colleagues, and I don’t think we slept more than five hours any night.  Good thing it didn’t last longer or we might have expired.

I can’t speak to content because we had no exposure. But asking people coming through the exhibit hall what moved them, we heard about IEX CEO Brad Katsuyama’s general session on the state of markets (we said hi to Brad, who was arriving in from New York about 1am as we were wrapping for the night and heading to bed).

“He said the exchanges are paying $2.7 billion to traders.”

That what folks were reporting to us.

You remember how this works, longtime readers?  The big listing duopoly doled out $500 million in incentives to traders in the most recent quarter.  That is, exchanges paid others to trade on their platforms (the rest came from BATS Global, now part of CBOE).

Both exchanges combined earned about $180 million in fees from companies to list shares. Data and services generated a combined $750 million for the two.

There’s a relationship among all three items – incentives, listing fees, data revenues.  Companies pay to list shares at an exchange. The exchange in turn pays traders to set prices for those shares. By paying traders for prices, exchanges generate price-setting data that brokers and market operators must buy to comply with rules that require they give customers best prices.

I’m not ripping on exchanges. They’re forced by rules to share customers and prices with competitors. The market is an interlinked data network. No one owns the customer, be it a trader, investor or public company. Exchanges found ways to make money out there.

But if exchanges are paying for prices, how often have you supposed incorrectly that stocks are up or down because investors are buying or selling?

At art auctions you have to prove you’ve got the wherewithal to buy the painting before you can make a bid. Nobody wants the auction house paying a bunch of anonymous shill bidders to run prices up and inflate commissions.

And you public companies, if the majority of your volume trades somewhere else because the law says exchanges have to share prices and customers, how come you don’t have to pay fees to any other exchange?  Listing fees have increased since exchanges hosted 100% of your trading.  Shouldn’t they decrease?

Investors and companies alike should know how much volume is shill bidding and what part is real (some of it is about you, much is quant).  We track that every day, by the way.

The shill bidders aren’t just noise, even if they’re paid to set prices. They hate risk, these machine traders.  They don’t like to lose money so they analyze data with fine machine-toothed combs.  They look for changes in the way money responds to their fake bids and offers meant not to own things but to get fish to take a swipe at a flicked financial fly.

Take tech stocks.  We warned beginning June 5 of waning passive investment particularly in tech. The thing that precedes falling prices is slipping demand and nobody knows it faster than Fast Traders.  Quick as spinning zeroes and ones they shift from long to short and a whole sector gives up 5%, as tech did.

Our theme at NIRI National this year was your plan for a market dominated by passive investment.  Sometime soon, IR has got to stop thinking everything is rational if billions of dollars are paid simply to create valuable data.

We’ve got to start telling CEOs and CFOs and boards.  What to do about it? First you have to understand what’s going on. And the buzz on the floor at NIRI was that traders are getting paid to set prices. Can mercenary prices be trusted?

The Rising

Can’t see nothing in front of me. Can’t see nothing coming up behind. 

Those of you who know me know I would never write “can’t see nothing.” But Bruce Springsteen can get away with it.

He and the E Street Band put out the eponymous album on July 30, 2002, and it was appropriate for the stock market as the S&P 500 bottomed October 4, 2002 at 800 and proceeded with The Rising, traveling steadily upward to 1,561 by October 12, 2007. 

We didn’t return until Mar 2013, taking longer to get back than to arrive in the first place.

Now we’ve had variations on a Rising theme for eight years. The market bottomed this week in 2009, on Mar 6, at 683 for the S&P 500, lower than when our troubadour from Long Branch, NJ first commanded in gravel and guitar that we come on up for the rising.   

As with the last lyric in Bruce the Bard’s melody, it’s on wheels of fire that we’ve come rolling down here to 2017 in the stock market, blistering records and burning up the tape. 

We at ModernIR study equity data in our inimitable way, the cross of our calling, Bruce might say.  And that’s all the poetry I can muster.  But I’ve got some facts.

We measure Sentiment on a purely mathematical basis, tracking how the four big reasons people buy and sell interact with market prices and where these wax and wane.

We’re good at capturing short-term asset-price changes. We’ve been doing it for a long time. Our five-day forecasts are roughly 95% correlated to the actual average prices for stocks after the five projected days have elapsed – statistically interchangeable.  

Putting it in English, in short spans we can foretell the future, using math, because the money in the market is using math in ways we can observe with precision. 

Here’s what we know about market Sentiment and short-term prices. For 77 consecutive days now, back to Nov 14, 2016, the stock market has been about 5.0 or higher on our 10-point Sentiment Index.  Since June 2012, some 1,200 trading days, 715 have been 5.0 or higher. It’s been a bull market.  But ten percent are in a row since the election. 

Remarkable. (Aside: If you want to kick this around, catch me Friday at the NIRI Silicon Valley Spring Seminar.)

To our knowledge, the previous record for extended neutral or better Sentiment without a single tip to negative was 53 days, from Feb 22 to May 6 last year.  Back in 2013 when we had a momentum stock market, our Sentiment gauge would carom from below 4.0 to over 9.0 – a rocking Richter event – about every month. 

Here’s the thing:  When last year’s epic Sentiment run concluded in May, we were never able to rise sustainably again – until November. It required an extraordinary catalyst in the form of the Wildly Unexpected Donald Trump. The S&P 500 finished October 2016 lower than it wrapped May 2016. Even with another massive catalyst, the Brexit Boomerang, between. 

This is not scientific. It’s not fundamental. It’s not a factor model. But it IS mathematical, and it does reflect how money behaves today. Here’s my conclusion: Without an extraordinary event, a catalyst, when this long Sentiment run atop 5.0 stops, it will mark the end of this particular bull market. 

What’s a real-world application for investor-relations people? We track Sentiment for you.  When you’re Overbought your price will fall, absent a catalyst. When you’re Oversold, barring a tsunami, your shares will rise. It’s not rational. It’s math.  

You can use this data to your advantage.  When you’re a 10, call a couple of your good value holders to check in, because you’re likely to dip, and if your holder buys (you will be on their minds), you might revert to 5.0 quicker – and 5.0 stocks are the bedrock of solid investment portfolios. 

And vice versa. You’re 1.0?  Pick up the phone. The first investor to buy probably makes money (and will remember to look when next you call) and you’ll return to 5.0. It’s not what you say. It’s that you call that counts. Put yourself on the screen.

Won’t that work for the market? Sure.  At Feb 11 last year, the market was a 1.0/10.0. Great time to buy, turned out.  It was a Rising. 

We don’t know what’s ahead. Don’t know what’s coming up behind. But the math says we’ve had it good for a record stretch. It’s hard to keep setting records. 

Interconnection

“I must say as to what I have seen of Texas it is the garden spot of the world.”

Davy Crockett said it and left it at the Alamo. So we’re glad to be inside Austin’s city limits sponsoring the NIRI Southwest Regional Conference.  We doubt temperatures will be kinder than New York’s last week though.

There’s a pattern to what’s unfolding in the market and it impacts us. There’s also chapter tapestry to the investor-relations profession spread unevenly over the fruited plain and knitted in spirit, a durable comforter made hardy by decades and camaraderie. We’re wired to see the world as story. It makes those in this pursuit exceptionally adept at translation.  It’s what we do.

Just as our corps is animated by the inexplicable genius of humanity, a most complex and marvelous machine, so is the evolving investment landscape.  At root, human intelligence presses the button, and the machines thus run.

I’ve given this considerable thought in preparation for my TED talk Thursday in Texas. I’ll speak on market structure of course, but it’s more. An aside, make it IR duty to hear this TED video of 15 minutes from Kevin Slavin, masterful on market structure without meaning to be.

Current stock-market distress would move Rod Serling the impresario because it’s a Twilight Zone merger of Man, money and machines. It scares us. Right? We all live by the ticker (so to speak). Our profession is interlaced but now so is the planet.

Ever played poker? You pay twenty bucks for a stack of chips and you play till you win or you’re out. Suppose we floated the value of chips. Rather than a fixed buy-in, every table’s pot value would float versus another table’s, and all the dealers at all the tables would continually add to or subtract from chips in every player’s pile to balance out positions versus players at other tables.

This is what the world is doing with currencies. Money. You need to understand it in the IR chair. We borrow money from China and then depreciate our currency and depress our interest rates to zero so the impact of borrowing will be minimal. China then devalues its currency to keep from losing money on the debt we owe.

On Aug 12, the Chinese government devalued the yuan. There are some $500 trillion of interest-rate and currency swaps globally and if a big currency moves, it’s a de facto change to interest rates.  Investors and their counterparties underwriting rights were caught out. So during options-expirations Aug 19-21, markets fell.  This is Man at work.

Now we come to Exchange Traded Funds, the chief investment vehicle of the modern era. ETFs post positions every day by law. It’s inconvenient to continuously change share-holdings so they routinely use derivatives like options and futures instead, which is permitted by law. And machines modulate it. We last had a material stock pullback in 2011, last saw a bear in 2008. ETF assets have doubled since 2012. We have no idea how ETFs will act in a down market, frankly.

But we just got a clue.  On Aug 24, the new series of options and futures marketwide began trading – and markets imploded. What happened? We think demand from ETFs for options and futures was so poor that markets simply imploded at the open. Lack of demand is as big a price-setter as selling (put that on a t-shirt).

Today, everything is connected.  If ETFs, which are ephemeral supply or demand, stop using derivatives, it means indexes are faltering, which means you and I are getting wary in our 401k’s, which means fast traders are shy about setting prices, and all of it comes back to floating currency values, pontoons upon which global consumption dances in a delicate balance.  Nobody knows what’s real.

It’s not one thing.  And yet it is.  Humans don’t like uncertainty so they transfer its risk to somebody willing to pay to cover it.  Now that process is starting to reverse after seven years.

What we don’t know is who ended up with the risk. What we do know is that IR better be able to explain it.  That’s market structure.  Not story. So don’t miss my session tomorrow in Austin.

Being Novak

What moves you?

I gave it thought during ModernIR’s tenth NIRI National (I think 18 of them total for me now) at the Hyatt Regency in Chicago, here looking north across the river from the 33rd floor. It’s easy to fall into habits and skirt that unique brand of satisfaction bred in a job done well. We humans are given to routine.

Worn out after, Karen and I repaired last weekend to a resort on Arizona’s Carefree Highway, inspiration for an iconic Gordon Lightfoot tune, and were moved to tranquility despite the anvil heat. The desert offers a rich diversity of flora and fauna (extra points for spotting the cottontail) easy to miss in the confrontational brutishness of its mid-June exterior.  We embraced it and reflected.

To give our best we must be motivated.  A week ago in Chicago, we were clustered at evening with others in the Purple Pig, dining on that gastropub’s moving cuisine. We’ve done it twice now and relished both occasions. This one offered something special.

Space is a premium and so we were seated by another couple, kind and engaged youngsters by Karen’s and my estimation, a few years in age behind us (how time flies). We struck up a conversation.

I didn’t ask them if could share it so I’ll change names to protect privacy. I’ll call him Novak, her Andrea.  He was born in Serbia, then Yugoslavia, the son of wealthy parents who lost most everything when war erupted there in the 1990s. They came to the US.

Novak found real estate. What he lacked in language and knowledge he offset with motivation.  In realty then, the fax machine was dominating communication and Novak found a man to modify a PC circuit board so it could continuously dispense listings. He’d collect them all in the office and cut and paste and copy and fax, the PC dialing nonstop.

Of course faxing drove people crazy, both recipients and colleagues. But “every morning I had an offer,” Novak said.  He was a machine himself.  With indomitable motivation to be the best he became it, selling a billion dollars of real estate.

A buyer for a building he was selling was Andrea, and they married and now ten years later they have two children and a real estate development firm with a hundred people and millions in assets and they support a charity theater they created to perpetuate their own sense of what it means to be inspired and moved.

One of my favorite IROs talks about the line between what she calls “mailing it in” and setting oneself apart in our profession. If you’re not careful, investor-relations becomes repetitious. Quarterly reporting, annual reports, road shows, conferences, it runs together. You start dismissing new thinking as an affront to convention (this is true in politics too).

What’s the secret to fresh and new every day?  Being Novak. Finding inspiration that moves you to set yourself apart.

What thrills about market structure still after ten years is its never-ending novelty.  Today’s investor-relations officer must know Story, sure. But that’s just half the job.  The rest today is Structure – the way the market works. The knowledge of it is powerful and it breathes added vigor into the patterns of our profession.

Motivation. I remember when Tim Tebow tweeted that one-word anthem. We don’t all have to be Novak, conquering heights.  But learning market structure today is motivation – and since Structure is as important to price now as Story (yup, true), you’ll be enhancing your career.

And that’s uniquely satisfying.

The Escalator

As the US investor-relations profession’s annual confabulation concludes in the Windy City, we wonder how the week will end.

The problem is risk. Or rather, the cost of transferring it to somebody else. Today the Federal Reserve’s Open Market Committee Meeting adjourns with Janet Yellen at the microphone offering views on what’s ahead. The Fed routinely misses the economic mark by 50%, meaning our central bank’s legions of number crunchers, colossal budget and balance sheet and twelve regional outposts supporting the globe’s reserve currency offer no more certainty about the future than a coin flip.  That adds risk.

The Fed sets interest rates – not by ordering banks to charge a certain amount for borrowing but through setting the cost at which the Fed itself lends to banks. Higher rates paradoxically present lower risk because money can generate a return by doing nothing.  Idle money now wastes away so it’s getting deployed in ways it wouldn’t otherwise.

If you’re about to heave this edition of the Market Structure Map in the digital dump, thinking, “There goes Quast again, yammering about monetary policy,” you need to know what happens to your stock when this behavior stops. And it will stop.

When the dollar increases in value, it buys more stuff. Things heretofore made larger in price by smaller dollars can reverse course, like earnings and stock-prices.  As the dollar puts downward pressure on share-prices, derivatives like options into which risk has been transferred become valuable. Options are then converted into shares, reversing pressure for a period. This becomes a pattern as investors profit on range-bound equities by trading in and out of derivatives.

Since Sept 2014 when we first warned of the Great Revaluation, the apex of a currency driven thunderhead in things like stocks and bonds, major US equity measures have not moved materially outside a range. Despite periodic bouts of extreme volatility around options-expirations, we’re locked in historic stasis, unmatched in modern times.

The reason is that investors have profited without actually buying or selling real assets. This week all the instruments underpinning leverage and risk-transfer expire, with VIX volatility expirations Wednesday as the Fed speaks. The lack of volatility itself has been an asset class to own like an insurance policy.

Thursday, index futures preferred by Europeans lapse. There’s been colossal volatility in continental stock and bond markets and counterparties will charge more to absorb that risk now, especially with a sharpening Greek crisis that edges nearer default at the end of June. Higher insurance costs put downward pressure on assets like stock-prices.

Then quad-witching arrives Friday when index and stock futures and options lapse along with swap contracts predicated on these derivatives, and the latter is hundreds of trillions of notional-value dollars. On top of all that, there are rebalances for S&P and Nasdaq indices, and the continued gradual rebalancing of the Russell indexes.

Expirations like these revisit us monthly, quad-witching quarterly. That’s not new. But investors have grown wary of trading in and out of derivatives. Falling volumes in equities and options point to rising attention on swaps – the way money transfers risk. We see it in a trend-reversal in the share of volume driven by active investment and risk-management. The latter has been leading the former by market-share for 200 days. Now it’s not. Money is trying to sell but struggling to find an exit.

Here at the Chicago Hyatt Regency on Wacker Drive, when a NIRI General Session ends, the escalators clog with masses of IROs and vendors exiting. Index-investing, a uniform behavior, dominates markets and there is clogged-escalator risk in equities.

It may be nothing.  Money changes directions today with staccato variability. But our job as ever is to watch the data and tell you what we see.  We’ve long been skeptics of the structure wrought by uniform rules, and this is why.  It’s fine so long as the escalator is going up.  When the ride ends, it won’t impact all stocks the same way, however, because leverage through indexes, ETFs and derivatives – the power of the crowd – has not been applied evenly.

This year’s annual lesson then is no new one but a big one nonetheless. Investor-relations professionals must beware more than at any other time of the monumental uniformity-risk in markets now, wrought not by story but macroeconomics and structure.

So, we’re watching the escalator.

The Big News

With crowning dreams of California Chrome and the unfortunately tinny conclusion to the equine trifecta dominating news, you might have missed what counted last week.

There was Liquidnet, operator of a members-only trading market for the buyside (a “dark pool”), paying $2m to settle SEC charges it shared confidential client information through its Infrared ID program at the NYSE and a couple other applications.

There was Wedbush, clearing firm for high-frequency traders, facing SEC charges that it inadequately policed how clients used its brokerage desk to directly and anonymously trade stocks (called sponsored access or direct market access for you word collectors).

Big news, both. But not The Big One.

No, I learned the big news first from Karen (our chief operating officer and my beloved spouse), who emailed a link saying, “Read this.” Not much later, Joe Saluzzi (NIRI National was fortunate to have Joe as my fireside-chat guest yesterday afternoon on whether markets are both broken and rigged) emailed snippets and said , “From Chair White speech…”

He meant Mary Jo White, SEC chair. She’d addressed the Sandler O’Neil Global Exchange and Brokerage conference June 5. And she said, drum-roll please:

“The secondary markets exist for investors and public companies, and their interests must be paramount.” (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!

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…)

MMI, not MMA

A good exit strategy. It’s always wise to have one.

With the polar vortex bearing down on the national midsection last week, our exit strategy, fortuitously, was sponsoring NIRI’s fundamentals of IR program in Santa Monica. Karen snapped this dusk photo in shirtsleeves from our 8th-floor balcony at the Loews Santa Monica Beach Hotel. Yes, we were smiling.

The letters “MMA,” as many of you know and equally many of you could hardly care less about, stands for “mixed-martial arts” and describes a contemporary take on Roman gladiators, except the people involved in it are probably less refined than their progenitors 1,500 years ago.

To us, high-frequency-trading is sort of the MMA of markets. It’s a brief, violent, high-speed contact sport. Having so uttered, I may expect now to hear from these traders’ new lobbying group called MMI – the Modern Markets Initiative – which seeks to cloak HFT in finer and more agreeable raiment.

Here’s what’s happening. Several HFT firms including Hudson River Trading and Quantlab Financial (I mentioned both in a recent MSM) have banded together, hired some former political strategists, and launched an organization intended to change public perceptions of HFT and flex HFT muscle in regulatory and political circles.

Claims the website: “High frequency trading firms and the market professionals behind them are harnessing technology to enhance price transparency and increase access to markets for investors that was previously only available to a select few.”

It’s an impressive effort to seize the agenda and refashion it. A flashy video at the site likens HFT to robotic mechanization in manufacturing – turning human tasks into ones driven by machines.

MMI recasts HFT not as arbitrage but as “automated trading technology” run by professional traders whose core purpose and function is to help everybody out by lowering trading costs, creating clearer prices and opening markets to more folks.

Well, shazam, let’s everybody hug! Right? Not exactly. We’re not criticizing the human ingenuity behind HFT. Traders didn’t create the rules requiring every node on the data network comprising the national market system to be connected in order to shuffle shares around the best price (imagine if the only differentiator in all products were price…human creativity would suddenly stampede off some permanent cliff into a gooey protozoan puddle). (more…)