Tagged: Rational Price

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.

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…)

En Route to Knowing

I got a kick out of that movie, Night at the Museum.

Yes, it’s old, and no, we haven’t seen any of the movies that contended alongside Argo for Best Picture this year. But there were several times yesterday as clients reported results in a restive currency-addled market when I thought how things aren’t what they seem. If you could get below the surface, you’d find a tiny little tough cowboy who looked like actor Owen Wilson.

Just kidding. All analogies break down. But often in the market, what you think you’re seeing isn’t what it seems. One client’s share price shot up in the early going with results, jumping nearly 8%. Then it declined 4%. Imagine if gas prices did that every day. But I digress. The price finished right in line with the Rational level – fair market value from a fundamental perspective.

Why the gyrations? Speculators had bet on weak results (something that can be observed), and results weren’t. Traders covered, driving price up. Passive investors like indexes were Hedged. They’d farmed out risk, but surrendered upside. As price suddenly rose, counterparties with rights to gains above certain levels locked them. They’re not investors. When they sold to keep their collar profits, price reverted to the Rational level.

Market price may or may not reflect an investment purpose. Let’s use an example many can appreciate: An analyst ups her price target and rating on your shares, and price climbs 4%. We assume that investors responded. We explain to management, “Investors liked the Outperform rating and higher price target, and bought.”

But was it investment behavior? What if those gains evaporate three days later when the dollar rises100 basis points because Europeans think Italy will need more help from Germany and rush to buy dollars? That’s risk-management behavior, right? (more…)

Who Owns My Shares

Why don’t trading and ownership match?

Sometimes you must change your point of view – put on the Magic Market Structure Spectacles – to see the truth. Say twenty-five institutions own 75% of your shares. From one month to the next there is little change in names or holdings. The remaining 25% of shares must be changing hands every few hours. Right?

In one of the better movies Nicolas Cage made before he became desperate to pay his back-taxes, his character Benjamin Franklin Gates in National Treasure found Ben Franklin’s spectacles and decoded a treasure map on the back of the United States Constitution.

That was in 2004. They were still using flip phones. In the stock market, Regulation National Market System hadn’t yet transformed trading. Yet eight years later with smart phones in most hands, IR teams and executive suites are still looking at ownership data to understand share-prices.

Grab your Magic Market Structure Spectacles. A midcap stock the past 20 trading days averaged 3.1% intraday volatility – the gab between highest and lowest price during the day. The spread in daily closing prices is half that, at 1.6%, and only if you apply absolute value. Net the ups and downs in closing prices and the cumulative price-difference in 20 days is 7%.

Now, add up intraday volatility. Anybody want to take a stab at it? Think of a number. Got it? Okay, the envelope, please. And the winner is…62%.

Yes, you read that right. Total intraday volatility is 62% in a single month when the apparent change in price is just 7%. What does that mean to “market neutral” money that hedges assets every day and trades for yield?

A treasure trove. Yet for that same stock we found Rational Prices (where active investors outraced everybody else to buy shares) on just 14.7% of trading days. (more…)

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…)

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…)

The 11.1% Occupying Earnings

The One Percent is a catchy phrase. But statistics highlight the 11.1%.

It’s earnings season. Fifty-seven percent of our clients have reported, our data show. In the past five days across the Nasdaq segment, rational investment activity – which means what you think it means – was 11.1% of volume.

Translating, just over one of ten trades in Nasdaq-listed companies (the NYSE was better but could flip-flop next week) resulted from active investment. Statistically, 88.9% of volume – not as cool as 99% but we report what the data show – was driven by something besides thoughtful investment.

Did your stock behave as you expected when you reported?

Our first client to report plunged through hedges and closed down 13%, and we hadn’t hit options expirations (Apr 18-20). A host of clients with calls before Apr 20 beat expectations and gave solid guidance. Half closed up; the other half, down.

Do the 11.1% matter? Unequivocally. So do the 88.9%. I’ll give you examples. A small-cap tech company last week closed down 6% on a miss and weak guidance, but data showed shares trading in what we call the “Midrange,” meaning money had mixed reactions. The stock’s up now.

Wait a minute, you say. How can money have mixed reactions to a miss? A lot of money doesn’t value shares on multiples alone. Any more than world markets peg the US dollar to its redemption value from the US Treasury (zero).

Shares have relative value, and speculative value. Relative value means “what’s this stock worth compared to alternatives in the group or market?” Speculative value means “will this stock help me net a profit in a portfolio of things that fluctuate?” Good answers to both questions can mean stocks rise on – or right after – misses. (more…)

A Blueprint for Modern IR Strategy

There are old guys around a table watching video.

No. They’re not IR professionals. But stay with me for two minutes.

One says, “He’s got a good swing.”

“He’s got the build of a hitter,” adds another.

“Been playing ball his whole life,” a third guy says.

In last year’s Brad Pitt movie, Moneyball, baseball scouts size up players with the right look because that’s the way it’s always been done.

The movie tells how Billy Beane at the Oakland A’s stood that idea on its head and transformed baseball with data-analytics. What wins games? Runners on base. By any means. For the rest of that story, see the movie.

The rest of our story here is a radical IR proposal. For the past 20 years, the investor-relations profession has relied on our industry’s version of “the build of a good hitter.” You do certain things because that’s the way it’s always been done.

What if there’s more to it? As data-analytics has transformed baseball, internet search, how grocery-store shelves are stocked, and the way advertisements connect people and products, it should also transform IR. (more…)

A Rational View of Share Prices

Belated Happy Thanksgiving!

After breaking for a week as an act of giving thanks, we’re back. Karen and I joined 88,622 others in Aggieland at Kyle Field in College Station for the A&M football game last Thursday versus the Texas Longhorns. Disappointing outcome, great Thanksgiving.

There’s something special about Texas. People passing you on the street say hi and the kids say yes ma’am and yes sir. There’s a lot of what Kenny Chesney calls “the good stuff.” What may be the world’s greatest college bar, the Dixie Chicken, sits on the main College Station drag like an Old West saloon. Batwing doors, even.

Speaking of swinging doors, gyrations in markets make it awfully hard to use your stock price to measure investor sentiment (wasn’t that the idea behind exchanges?). In fact, there’s inherent contradiction between the way markets behave now and how the IR profession cultivates holders.

IR folks typically seek buy-and-hold money that does not trade. Yet executives frequently ask about the stock price. The news rushing at us round the clock tries to explain market behavior in rational terms. Yet stock prices are set by the latest fleeting bid or offer. Nine of ten times, those prices are not rational. (more…)

The Trouble with Liquidity

We can’t compete with beat-by-beat election updates, so we’ll keep it short and sweet.

Speaking of sweet, we came back last night from six days in the desert trinity—Moab, Sedona, Santa Fe. Hard to beat this time of year!

You heard the one about two guys getting robbed? They’re walking down the street, a mugger stops them and demands their wallets. As they’re complying, one reaches in his wallet before handing it over and says to the other, “Here’s that $20 I owe you.”

It may be like that with the obsession over liquidity in the trading markets. (more…)