Tagged: Stocks

Dark Costs

Credit Suisse. Deutsche Bank. ITG. Pipeline. Barclays. UBS. BNP Paribas. Citadel. Goldman Sachs. Liquidnet. Bank of America Merrill Lynch. Citigroup.

What commonality unites these firms? All have been fined for violating rules on so-called dark pools, private stock-trading venues.  At least three are now defunct, Pipeline shutting in 2012, Citi halting its Lavaflow unit last December after paying $5 million to regulators for compromising customer data, and Citadel saying in March this year it would mothball its Apogee platform.

Morgan Stanley and JP Morgan have been investigated but as yet have had no knees capped in the twilight. This is no collection of backwater outfits but a brokerage Who’s Who. These firms are running your buybacks and underwriting your offerings, the pillars upholding equity market-making and liquidity for shareholders.

Ask any Vice President of Marketing at a public company how the firm’s products and services are sold and you’ll get an unhesitant response. But your CFO likely doesn’t know what a dark pool is or why the big brokers running them are continually afoul of rules. You’re the product manager of the equity market if you’re occupying the IR chair. You’ve got a golden opportunity (and in a sense a duty) to be the expert.

Word is ITG, a publicly traded firm itself and among the largest independent operators of markets serving as alternatives to the big exchanges, will pay more than $20 million to settle allegations of trading against customer orders in 2010. It’ll be a test for the company to survive a wallop of this proportion.

Citadel, the hedge fund founded by mogul Ken Griffin, has been fined more than 20 times for breaching various rules. A bad actor?  Visit the Finra newsroom (formerly the National Association of Securities Dealers, Finra is the watchdog for stock brokers) and you’ll see a continuous litany. In the past month alone Goldman Sachs, Raymond James, Wells Fargo, LPL Financial and Aegis Capital were fined tens of millions collectively for demeaning market rules. In May and June, Morgan Stanley paid $3 million.

If everybody is paying regulators, could it be market rules are like the tax code – so byzantine that everybody is routinely in violation? We could countenance a concatenation of penalties for fringe firms jobbing the innocent. But fines are the central tendency. It feels like Las Vegas when Bugsy Siegel ran it.  You’re gonna pay the vig. (We think regulators want to end dark pools. Since they created the rules – Regulation ATS and the Order Handling Rules – that birthed dark pools, they don’t want to reverse themselves. So they may instead penalize alternative venues out of existence.)

Why would public companies accept a market so complicated that Goldman Sachs can’t comply? It gets once more to the IR job today.  At minimum we should understand and measure its performance as we would any other market to ensure that our best interests and those of customers and shareholders are being served. If you want to sell in China, the market is big but what determines whether you can or not is structure.

“Dark pools” is an inaccurate term but if you’re an investor-relations officer you should understand them.  Exchanges like the NYSE cannot give preference and must post prices. They’re public markets.

Dark pools are not public. You need permission from the market’s operator to use one, and most don’t list prices for shares because the reason they exist is to escape a bizarre feature of the stock market: List a price and somebody will attempt to be above or below it in order to keep your price from being matched. Prices are today like the way a friend of ours in California describes using turn signals when driving: A sign of weakness.

So dark pools decide who gets to enter, and the products in dark pools like your shares are listed by amounts, not price. If a pool has 10,000 shares of XYZ, the price will be halfway between the best bid to buy them and offer to sell them in the public market. Ostensibly nobody knows I’m after at least 5,000 shares so I get more at a decent price.

See?  Now think about that. A mall brings people wanting to consume things together with retailers selling them.  In the stock market, complex rules make it challenging to find anyone selling what you want to buy, and the moment you lift a finger, the price changes (this is why your investors increasingly use ETFs and other derivatives – it’s too complicated to get big amounts of the underlying asset).

You say, “I’m a road warrior, a vagabond of highways and jetways, a troubadour of the corporate story. I don’t have time for this stuff!”

Have we got it backwards? Shouldn’t we first understand – and have a say in – the market for our shares before we market our wares?  (I fashioned that rhyme myself.)  Structure counts. Caveat emptor.  Latin but timeless.

Three Days

Some energy-sector clients lost 40% of market-capitalization in three days last October.

A year and a half cultivating share-appreciation and by Wednesday it’s gone.  How so?  To get there let’s take a trip.

I love driving the Llano Estacado, in Spanish “palisaded steppe” or the Staked Plains. From Boise City, OK and unfolding southward to Big Spring, TX lies an expanse fit for nomads, an unending escarpment of mottled browns and khakis flat as iron rail stretching symmetric from the horizon like a sea.

Spanish explorer Francisco Coronado wrote, “I reached some plains so vast that I did not find their limit anywhere I went.” Here Comanches were dominating horse warlords for hundreds of years. Later sprouted first the oil boom early last century around Amarillo and again in the 21st century a neoclassical renaissance punctuated by hydraulic fracturing in the Permian Basin.

The air sometimes is suffused with mercaptan, an additive redolent of rotten egg that signals the otherwise invisible presence of natural gas. But the pressure of a relentless regimen silts away on a foreshortened compass, time seeming to cease and with it the pounding of pulses and devices.  It’s refreshing somehow.

And on a map one can plot with precision a passage from Masterson to Lampasas off The Llano and know what conquering that route demands from clock and fuel gauge.

Energy stocks in August 2014 were humming along at highway speed and then shot off The Llano in October, disappearing into the haze.

(Side note: If you want to discuss this idea, we’re at the NIRI Tristate Chapter in Cincinnati Wed Mar 18 and I’m happy to entertain it!)

What happened?  There are fundamental influences on supply and demand, sure. But something else sets prices. I’ll illustrate with an example. Short interest is often measured in days-to-cover meaning shares borrowed and sold and not yet bought and returned are compared to average daily trading volume. So if you move a million shares daily and your short interest is eight million, days-to-cover is eight, which may be good or bad versus your average.

Twice in recent weeks we’ve seen big blocks in stocks, and short volumes then plunged by half in a day. Both stocks declined. Understand, short interest and short volume differ. The former is shares borrowed but not yet covered. It’s a limited measure of risk.  Carry a big portfolio at a brokerage with marginable accounts and you can appropriate half more against it under rules.

Using a proxy we developed, marketwide in the past five days short volume was about 44%, which at 6.7 billion total shares means borrowed shares were 2.95 billion. Statistically, nearly 30% of all stocks had short volume above 50%.  More shares were rented than owned in those on a given day. (more…)

Listing

Why do you need an exchange?

Between the Tiber River and the Piazza del Quirinale in Rome sit the remains of Trajan’s Market, built around 100 AD by that Roman emperor famed for militaristically expanding the empire to its zenith.

Considered the world’s first covered multistory shopping mall, Trajan’s Market, designed by Greek Damascan architect Apollodorus, ingeniously and conveniently clustered vendors and shoppers. Thus that era’s real estate industry saw the importance of location, a timeless lesson.

Taking queue from the ancients, our financial forebears on Broad Street in New York City similarly fashioned a marketplace in 1792, after for some time trading stocks under a buttonwood tree. The bazaar they birthed called the New York Stock Exchange aggregated the investors with cash and the growth enterprises needing it. Investing leapt toward the modern era.

That worked well until exuberance and mushrooming Federal Reserve currency supplies collided in 1929. Then the government said, “All right, everybody, out of the pool.”

With the Securities Act of 1933 and the Securities Exchange Act of 1934, the government sought to introduce safety to markets by eradicating fun and frivolity.  No longer would stock brokers hold court without a king, insouciantly supposing they could match buyers and sellers on merits without a bunch of paperwork with alphanumeric identifiers that governments so prefer.

As a result, some 82 years after Government ordered everybody to stand in lines and fill out forms, public companies in these here United States in 2015 need an exchange to list shares if they want the public to trade them (there are exceptions on the smaller end, the over-the-counter market, which has many thousands more companies than the big National Market System – but that’s a story for another time).

The question now is does it matter where you list your shares? We can prove in less than a blink of an eye that location, location, location is irrelevant (that should be our first clue that something is amiss) today in the equity market.

No, really.  We can show you in a split-second.  If you’ve never seen it, watch these ten milliseconds (the blink of an eye is about 300 milliseconds) of MRK trading compiled by data firm Nanex and posted to Youtube. (more…)

Risk

We figured if The President goes there it must be nice.

Reality often dashes great expectations but not so with Martha’s Vineyard where we marked our wedding anniversary. From Aquinnah’s white cliffs to windy Katama Beach, through Oak Bluffs (on bikes) to the shingled elegance of Edgartown, the island off Cape Cod is a winsome retreat.

Speaking of retreat, my dad, a Korean Police Action era (the US Congress last declared war in 1943, on Romania. Seriously.) veteran, told me his military commanders never used the word retreat, choosing instead “advance to the rear!”

Is the stock market poised for an advance to the rear? Gains yesterday notwithstanding, our measures of market sentiment reflected in the ten-point ModernIR Behavioral Index dipped to negative this week for the first time since mid-August. Risk is a chrysalis formed in shadows, studied by some with interest but generally underappreciated.

It happened in 2006 in housing, when trader John Paulson recognized it and put on his famous and very big short. Most missed the chrysalis hanging rather elegantly in the mushrooming rafters of the hot residential sector.

It happened in the 17th century Dutch tulip bubble, an archetype for manic markets.  Yet then tulips and buyers didn’t suddenly explode but just the money behind both, as ships from the New World laden with silver and gold flooded Flanders mints with material for coin. Inflation is always and everywhere a monetary phenomenon.

It’s hard to say if mania is here hanging pupa-esque on the cornices of the capital markets. Most say no though wariness abounds. Mergers are brisk and venture capital has again propagated a Silicon Valley awash in money-losing firms with eye-popping values. Corporate buybacks will surpass $1 trillion in total for 2013-2014, capital raking out shares from markets like leaves falling from turning September trees. (more…)

CYNK Me

Movie tip:  Karen and I took our visiting teenaged nephew to see Edge of Tomorrow, starring Tom Cruise. Hysterically entertaining. Appropriate for teens (scary monsters but no gore), and gripping for adults!

There was a 1982 movie called The Scarlet Pimpernel (from the 1905 novel by Baroness Emma Orczy) in which the dashing protagonist Percival Blakeney (played by Anthony Andrews in the film) goes around saying, “Sink me!” with a lilting accent. Great movie.

I thought of it when this week’s theme came to us through alert reader Emily Walt at Carbonite, who first gave us a salacious peek at a firm burning up the pink sheets:  CYNK Technology (OTCMKTS:CYNK).

Most of you may now know that CYNK rose from nothing to $6 billion between June 17 and July 10, a return of 20,000%. Last Friday the SEC abruptly halted trading, with market cap still at $4 billion.

The pink sheets or the grey market, or what used to be called the OTC market, should not be confused with “over the counter,” which often refers to shares on the Nasdaq or securities trading between brokers. This is the market where standards are loose and risk is high.

CYNK Technology is run by a guy in Belize. This one fellow is listed as CEO, President, CFO, Board Secretary and the only director. SEC documents suggest the company has no revenues and no real business plan and few if any assets.

But something got folks going and it seems the germinating seed was the suggestion that the company’s website offers introductions to celebrities for a fee.  It aims, we gather, to be the social networking site where common everyday dweebs and goofballs can meet Johnny Depp and Angelina Jolie. (more…)

Equity Supply Chain

Dollar General (NYSE:DG) dropped 9% yesterday, offering a lesson to investor-relations professionals.

Before that, a plug: At NIRI National next week I’m paneling with the CEO of short-seller Tesseract Management and the head of securities-lending for Franklin Templeton on short-selling strategy and practices. Longtime NIRI fixture Theresa Molloy has organized a great discussion and will moderate. And please visit ModernIR at booth 719, our eighth straight year in the exhibit hall.

For Dollar General, revenues were light and guidance lighter, margins weakened due to the products folks were buying last quarter, and inventories rose 21%. Investors and traders can examine facts about the structure of Dollar General’s market, from margins to supply-chain, and make value judgments (which will be distorted by other market behaviors, however).

Have you considered that your equity market is also affected by logistics, supply-chain and who’s consuming the product? We perhaps never imagine that the stock market has the same characteristics and limitations of other markets. Have you gone to the shoe store and they didn’t have your size in the brand you wanted? How come that doesn’t happen in the stock market? (more…)

The Vessel

Will markets collapse?

We’re a day late this week, steering clear of election bipolarity marked by the vicissitudes of demography and the barest palimpsest of republicanism, a diaphanous echo of Madison and Jefferson and Hamilton, names people now think of as inner city high schools.

Back to markets. We’ve seen a curious change. A year ago, the top refrain from clients was: “What is our Rational Price?” For those not in the know, we calculate where active investors compete against market chaos to buy shares.

That’s not the top metric now. It’s this: “What’s your take on macro factors?” Management appears to have traded its focus on caring for trees for fearing the forest – so to speak. If so, the clever IRO will equip herself with good data.

We’ve been writing since early October about the gap between stocks and the US dollar. The dollar denominates the value of your shares. As the currency fluctuates in value, so do your shares, because they are inversely proportional.

In past decades since leaving the gold standard in 1971, those fluctuations have generally proven secondary to the intrinsic value of your businesses. But that changed in 2008. Currency variance replaced fundamentals as principal price-setter as unprecedented effort was undertaken by governments and central banks globally to refloat currencies.

Imagine currencies as the Costa Concordia, the doomed luxury liner that foundered fatally off the Tuscan coast. Suppose global forces were marshaled to place around it Leviathan generators blowing air through the ships foundered compartments at velocity sufficient to expectorate the sea and set the ship aright.

Thus steadied on air, the ship is readied for sail again, surrounded by a flotilla of mighty blowers filling the below-decks with air and keeping the sea back from fissures in the ravaged hull by sheer force. Passengers are loaded aboard for good times and relaxation and led to believe that all is again as it was. As seaworthy as ever.

That’s where we are. We are coming off the peak now of our fourth stocks-to-dollars inflationary cycle since 2008. In each case, markets have retreated at least 10%. The cycles are shortening. And despite retreat we right now retain the widest gap between the two since July 2008, right before the Financial Crisis.

Why does the pattern keep repeating? Because central banks keep juicing the blowers as the vessel wilts and founders. That’s what you saw yesterday after the election. The Euro crisis, having gone to the green room for a smoke is back center stage as it a year ago. Money – air – leaves variable securities for the dollar. As air leaves, stocks falter.

We don’t say these things to be discouraging. It is what it is. The wise and prudent IRO develops an understanding of market behavior – so the wise and prudent IRO will be cool in the IR chair and valuable to management and able to retain sanity and job security in markets depending on giant turbines.

If you’re relying on the same information you did in the past, you’re ill-prepared. We are in a different world now.

Don’t Roller-skate in Buffalo Herds

Karen and I caught the PBR rodeo at Denver’s National Western Stock Show. I grew up on a ranch and Karen likes four-footed creatures. So we support cowboys and their furry fellow athletes. Those bull riders are tough guys, but what got me thinking was the team-penning competition.

It reminds me of the challenge IR folks face. We’re in the middle of earnings, with options expiring Wednesday through Friday and capital moving like a herd loping from one corner of the corral to the other while riders try to cut one here and there.

In team-penning, that’s what you do. You’ve got three folks on smart horses and a herd of calves with numbers on them, and a clock. Tom Bailey, founder of Denver’s Janus Capital, is in the sport. The announcer might say, “Four, four, four,” and the team of riders tries to cut three calves with the number four on them from the herd and pen them at the other end of the arena in about 45 seconds. If one of the herd that shouldn’t be cut gets by, you’re disqualified.

The hardest part is getting the few away from the many. Calves don’t want to leave the herd. It’s like stocks (aptly named). There’s a great herd of equities. If investors are cowboys and cowgirls on horses trying to cut the few from the many, it’s a tall task. The herd sways the behavior of the ones they want to single out.

When the herd is rattled and scattered, it’s nearly impossible to get the three you want without mixing in others you don’t want and getting disqualified. One thing that can scatter and rattle the entire equity herd is options expirations. This week, these include the VIX and RVX volatility measures Jan 19, stock and index options with morning expirations (often favored by European and Asian structured products) Thursday Jan 20; and the whole kit and caboodle Friday from stock and index puts and calls, to treasury, bond, currency and interest-rate derivatives. (more…)

Quant Trading at the Hudson

Spring finally tossed its verdant cape over the Denver Front Range. We saw it firsthand on our bikes from Sedalia to Palmer Lake last weekend, our first 40-plus miler of the year. It’s been too cold! We know you Californians among us are already past the early and midseason allergens.

Meanwhile in Manhattan, down on Old Slip between Water and South streets there hums and whizzes a sharp shop of folks whose cares are far removed from the seasons. And apparently geography too, for Hudson River Trading sits just off the East River. (more…)