Tagged: SEC

NIRI Seattle-Style

If you like your NIRI National Conference crisp, Seattle delivers.

Gray days in the 50s gave those from the south a welcome break from drenching June humidity. Yesterday morning, the sun at last teased us as we savored our westward view of Puget Sound one more time from the Grand Hyatt before winging east to Denver.

One thing stood out this year to me. By my ground-floor observation walking and talking, paneling, chatting with clients and friends, Market Structure finally moved off the back row at NIRI.

It was like the markets yesterday roaring back nearly 300 points. People are starting to grasp that things like that aren’t fundamental. The Eurogloom didn’t miraculously give way to golden shafts of heavenly light. Spain and Italy didn’t wake suddenly to healed capital access. Economic readings weren’t swept skyward overnight on the economic equivalent of a giant stalk from a magical bean. Nothing changed.

So why did markets jump? Because policy makers said so. Federal Reserve officials were talking the dollar down in force – something we noted in your Market Structure Report macro sections, clients. And European officials huddled over strongly worded statements about the exigency of remedies.

Markets reacted like oil prices anticipating surging OPEC output. Ben Bernanke observed in a 2002 speech before he was Fed chairman that the act of credibly threatening an increase to the supply of money can have the same effect as if the supply has actually grown. He likened it to rumors of an alchemist claiming a way to conjure unlimited supplies of gold – and what the mere rumor would do to gold prices.

We saw this Emperor’s Clothes effect in sentiment. Last week sentiment was neutral, investment weak, the dollar marching relentlessly up. But right away Monday the dollar weakened, program trading picked up, and the occasional positive sentiment peeked out from data apathy. We’ve been telling clients since then in the “What’s Ahead” section of trading summaries to expect temporary improvement (that’s what it is).

In effect, we have the same thing in our equity market. Markets don’t behave the way most think they do – or how they should – and we’ve thus far been bystanders. A NIRI board member who stopped by our booth to gauge our views of the show said, “Market Structure has got to get higher priority. People are talking about it. It’s going to move up on the radar screen.”

Why is it so critical? Because lots of CEOs and CFOs don’t know how markets work. And when they ask us how they work, we IR pros often don’t know either, right?

If IROs don’t shoulder the educational challenge of crafting a clear picture, who will? Nobody. And if nobody does, our job security declines just like our ranks, which have thinned by an average of 270 companies each year for the past 14 years (no typo). That means we’ve lost a minimum of 3,780 IRO roles since 1998.

One grand bright spot on getting that clear picture shone during the panel on which I sat (if you’re a NIRI member, downloadslides or listen to a replay). Panelist David Weild, head of capital markets for Grant Thornton and chairman and CEO of the Capital Markets Advisory Group, proposed an Issuer’s Bill of Rights. Would you favor these five things? Would your executives?

1. Equal Standing for Public Companies. Issuers must have equal input to the trade execution community on market structure.

2. Representation. A standing issuer advisory council to the SEC made up of issuers and issuer advocates.

3. Transparency. Timeliness and completeness in trading and ownership data.

4. Choice in Market Structure. An end to the one-size-fits-all marketplace.

5. Centrality of Investment. A market structure that encourages fundamental investment strategies over trading tactics.

A client and good friend came up as we were dismantling the booth and said, “If we’re serious about this Bill of Rights, I’m willing to burn some political capital on it. We need to get organized.”

If these five rights make sense to you, kick them around with your CFO and CEO – and tell NIRI. Change rarely occurs from the top down, but from the bottom up.

Maybe we can at last rally as an industry and save ourselves. Seattle gave us hope.

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…)

The Facts

Mark Twain said, “Get your facts first and then you can distort them as much as you please.”

The 1959 annual review of Mark Twain’s accounts by his successors in Redding, CT, found that his IBM shares, perhaps once units of the International Time-Recording Co. formed in the 19th century, were worth $148,000.

That’s a little-known fact. By wading through fine print for years, we’ve not only passed on nuggets about humorists, but we’ve also found nifty facts proving trading markets have fundamentally altered the IR job.

We found a couple this week that may surprise you. The 2012 SEC budget reveals that the agency collected about $1.3 billion in “Section 31” fees in 2011.

Every trade earns the SEC a fee. Since 1933, the SEC Act (now US Code, Title 15, Sections 77 and 78) has allocated Section 6(b) fees for securities offerings, 13(e) fees on corporate stock repurchases, and 14(g) fees on proxy solicitation to “recover the costs to the government of the securities registration process…”

Don’t get lost in the b’s, e’s and g’s. Stay with me here. (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…)

You Can Change the World

At county fairs when I was a kid you could buy a “Shoshoni Weather Gauge,” which hawkers said could forecast the weather like an American Indian.

It was a rock tied with a leather strand to a wooden stand. The instructions said: “If rock is wet, it’s raining. If rock is dry and hot, it’s sunny. If rock is cold and covered with fluffy white layer, it’s snowing.”

Similarly, I saw this in a recent Bloomberg article: “The best way to keep pace with the S&P last year would have been a strategy that rotated between sectors based on the macro headlines,” said David Spika, fund manager at Westwood Holdings in Dallas.

That sounds a lot like “if rock is wet, it’s raining.” The elegance of simplicity notwithstanding, how do you distinguish the IR chair and your company’s shares in a market moving on whether the rock is wet or not?

One argument says you change your focus. Deemphasize the capital markets and instead get baptized in Dodd-Frank, proxy evolution, say-on-pay and myriad others rules and regulations oozing like molasses through public capital markets. Become a compliance concierge. Well and good. But you’ll be competing with internal and external legal counsel for thought leadership, and I find that the advantage lawyers have is they have law degrees. (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…)

Why Vanguard Likes High Frequency Trading

Editorial Note: This Market Structure Map first ran June 29, 2010. It’s reprinting because Tim Quast is following the lead of congresspersons by taking a “fact-finding junket” aboard a sailing vessel off the coast of Belize. It’s in the public interest.

Oscar Wilde said that illusion is the first of all pleasures. Of course he also wrote that anyone who lives within his means suffers from a lack of imagination.

Buttressed on either side with those brackets about illusion and means, let’s look today at what’s afflicting our market and why some institutions like transient trading when others don’t.

Vanguard, an institutional investor focused on passively managed funds, supports high-frequency trading. George Sauter, CIO for the Vanguard Group, wrote in the firm’s comment letter to the SEC on market structure that high-frequency volumes reduce trading costs through competition and tighter spreads. He quantifies the benefit to investors at roughly 10% over a decade. A passive fund providing 9% returns per annum would deliver only 8% returns without HFT. (more…)

Stocks, dollars and Newtonian physics

Isaac Newton posited 334 years ago in his third law of motion that mutual forces of action and reaction between two bodies are equal.

I wonder what he’d think of the relationship between the US dollar and equities, where this small action produces that decidedly unequal reaction.

After the Federal Reserve acted to shore up bank balance sheets by buying long bonds and mortgage-backed securities last week, the dollar trampolined and markets dropped like Newton’s apple.

Pundits blamed dismal economic data. Yet we saw money market-wide shifting from equities September 16 with quad-witching. Before the Fed offered a dim economic portrait. If money was reacting, it sure had a funny, proactive, organized way of showing it.

Today and Monday, the dollar weakened and stocks zoomed skyward in a Newton-flummoxing frenzy to reclaim paradise lost. How many believe this is rational investment behavior? If you do, there’s a solar-panel plant in California that might interest you. (more…)

Market Mayhem and Large Traders

Why are markets dropping like the thermometer at 8pm on Pike’s Peak?

Debt chaos, sour economic data, sure. We’re not market prognosticators, we track behavioral data. Under the skin of the news at market level, institutions shifted to managing portfolio risk about July 21. These events were observable. Algorithmic execution changed, and we saw what started it and what followed.

Large diversified asset managers swapped out of equities. That means they assigned the risk in portfolios to others through agreements that traded risk for safety at a cost. Why not just say “investors sold to manage risk”? It’s not accurate and it won’t be reflected in settlement data.

Of course, hedging produces a range of consequences too. Those underwriting hedges themselves hedge the risk they assume. That prompts speculating in whatever instruments are being used to hedge the hedges. The idea is to offset every point of exposure – like double-entry accounting, a credit for every debit.

Consider the Treasurys market – the one in peril till today. Primary dealers ranging from Banc of America to Goldman Sachs make markets in Treasurys. Average daily trading volume in Treasurys is more than $500 billion. Bond trading in total in the US averages more than $950 billion daily and nearly 80% is government securities.


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…)