Tagged: Surveillance

David Copperfield

The days are getting shorter. We’ve passed the longest one of 2017, Summer Solstice. Imperceptibly now the sun will move off its zenith.

Karen and I marked it here in Minneapolis before the NYSE’s Rich Barry and I talk market structure for the Edison Electric Institute’s investor-relations meeting today at the offices of host Xcel Energy downtown.

Last night in lovely and mild Minnesota at Café Lurcat off Loring Park south of central city, a group of us IR people were talking about measuring IR outcomes today.

“You track your owners in 13fs,” said one utility IR professional. “And you correlate your meetings with them, and we saw this one four times and their holdings went down, and this one over here not at all and they doubled positions.”

The problem isn’t IR.  It’s what’s being measured, and how it’s tracked.

Okay, we could go one step further.  If public companies were half as engaged in monitoring the market as the exchanges and high-frequency traders that have profited enormously from its opacity, we’d persuade officials to improve rules.

In fact, I’ve been invited to submit testimony for a congressional hearing next week on problems with financial markets such as the startling absence of companies from all rulemaking processes. Yes, congressional staffers see it just like we do.

I intend to articulate in the starkest terms how issuers are misled about the nature of their trading.  There’s no excuse for it. It continues because issuers are, paraphrasing that country song, treated like mushrooms. Google that.

Realistically, changing the rules takes time. What can we do right now?  You can know why intensive effort to track outreach and correlate it to ownership-change renders lousy results. What you’re measuring doesn’t reflect how markets work.

First, 13f ownership data is an act of Congress – from 1975. Forty-two years later everything has changed but the data used to measure ownership.  We had circular-dial phones then. Today your phone will talk to you.

Yet the 13f lives on (it’s Section 13f of the Securities Exchange Act, legislation expressly prohibiting discrimination against issuers). The measure was designed for a market where investors bought companies. Today 85% of trading volume daily comes from purposes and machines seeing stocks as products not stories.  About 48% of volume is borrowed every day – which doesn’t show up in ownership data.

Many hedge funds don’t have to report holdings because managed assets fall outside regulatory minimums. Exchange Traded Funds (ETFs) are posting assets daily while settlement data follows four days later – and 13fs post positions 45 days after the end of the quarter.  Half of daily volume has an investment horizon of a day or less.

About 13% of daily trading ties to derivatives, which don’t manifest in 13Fs. To wit, markets surged Monday and pundits declared it a return of enthusiasm for economic outcomes. The data showed a 17% increase in Fast Trading – an investment horizon of a day or less – drove Monday’s gains.

Machines were inflating equities to reprice the new series of options and futures trading Monday.  Yesterday counterparties were selling assets to cover short-term trading losses.

None of that is investment.  Much is sleight of hand. So is data that lacks answers.

What’s more, much trumps story. Interest rates, relative currency values, economic expectations and geopolitics, political elections and housing starts, central-bank actions and inflation and policy speeches, and blah, blah blah.

So what do you do?  First, start measuring the right data.  Ownership information cannot tell you what sets price.  Stop expecting miracles from your surveillance provider.  They’re great professionals but the rules around data make it a functional impossibility for you to find what you’re looking for in that data set.

Second, stop looking backward. Instead, do two things well from a messaging view.  Tell your story to a diverse palette of institutional relationships. Have a good follow-up plan.

Make these ideas science – matching product to consumer – and you’re helping the buyside find opportunities and the buyside in turn is helping you achieve the IR goal: A fairly valued stock and a well-informed market.

We have that science. We know every day what part of your volume is driven by passive investment and active investment. If you want help understanding the market, ask us. We do one thing well. Market structure.

Summarizing: Are the measures you’re using to benchmark your IR efforts a reflection of contemporary financial markets? If not, why not?

And why is your exchange, which makes money from rapid-fire trading, focusing your attention on shareholdings 45 days after quarter-end?  Feels like David Copperfield. Resist the illusion. You can and should have better information. Demand it.

Structural Distortion

“When I talk about this stuff with clients, they’re only half-listening until this phrase appears.”

Thus spake my learned friend Jim MacGregor, at Abernathy MacGregor in New York City, whose views I hold in high esteem.

“What stuff? What phrase?” I said.

“Market Structure. ‘How market structure can distort your price.’ You write about that,” Jim said, “betcha your readers forward that column to their bosses as much as the previous half-dozen combined.”

I’m not sure what that says about my earlier writ but Jim had my attention. He was saying that explaining how share-prices are affected by market behavior carries more substance than intoning “you need to understand market structure.”

“Market structure” is the behavior of money behind price and volume. Could certain behaviors be distorting fair value for shares?

Exchanges say no. Regulators claim there’s no proof. Surveillance providers tell you to ignore noise.

The biggest money manager today is Blackrock, with $3.9 trillion under management. Blackrock is a quantitative investor known for the $850 billion in its iShares ETFs. It allocates resources top-down. ETFs rebalance every day. Is that noise?

Of 4.5 billion shares trading daily in the US stock market, 1.8 billion, about 40%, are borrowed every day (some amount from Blackrock). That’s not owning, it’s renting.

There are 3,600 national-market-system companies in the US when you remove ETFs, investment companies and multiple classes of stock (I bet Blackrock owns every one). There are two million global indexes. Thousands in US equities are calculated every second. There are more ways to slice stocks than there are underlying corporations.

I was explaining market structure last week to the head of a major public brand, who asked why he should care about market structure if price reverts to a rational level over time. After my explanation, he became a client. I’ll come to what I said.

In Paris in June, Karen and I wanted to visit the top of the Eiffel Tower. The line at the north footing stretched dimly into the gloaming. We’d heard access was quicker at the south entrance. We went there. About 25 were waiting. We were elated. Except there are no elevators at the south footing. You climb. Market structure affected our behavior.

ModernIR monitors bottom-up investment behavior as a share of overall market volume (about 16% the past 12 mos.) and as a price-setter over various time-periods. (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…)

Quiet Period

Define irony.

Alanis Morrissette called things ironic in song and was criticized for the apparent absence of irony in her verse.

So is it ironic, or instead coincidental or paradoxical, that the SEC may consider speeding up information by removing the quiet period around IPOs at the same time that many are calling on regulators to slow down trading markets?

You may have seen that Rep. Darrell Issa (R-Calif) called on SEC chair Mary Schapiro to consider revising antiquated rules about information flow around IPOs. Ms. Schapiro seemed to concur in her August (not august) reply to Rep. Issa that change is worth considering. Rules were created to address disadvantage for small investors, then relaxed in 2005 as communications technology advanced.

The implication is that in a Twitter age where everyone can possess the same information (albeit we’re overwhelmed by endless talking and perhaps underwhelmed by actual doing) a quiet period makes sense like a black fly in your chardonnay. Or rain on your wedding day.

And no surprise, social media is at the heart of the matter. Facebook’s retail holders may have been, er, defaced as a result of regulation ill-suited to the kind of markets we’ve got today where word travels fast. If the quiet period goes away ahead of IPOs, can it be far behind around earnings calls? After all, doesn’t the same principle apply?

Irony is an expression conveying the opposite of what it seems. Some of us are guilty of this when we, for instance, say “nice to meet you.” Just kidding. (more…)

Why IR Pros Need to Love Some Math

Scheduling note: I’m in Miami Friday for a panel discussion on trading realities for the NIRI Senior Roundtable. Hope to see you there!

Today is the anniversary of Pearl Harbor. Near the end of WWII, my great uncle, Jack, was one of 316 sailors from 1,200 aboard the USS Indianapolis to survive its sinking and days in shark-ridden waters in the south pacific. Tough fellows, those guys.

On that happy note, let’s turn to everybody’s favorite topic: math. Click here for an example of math in action, a chart showing the spot market for the US dollar, called the DXY, and the Dow Jones Industrial Average, the past three months. The two juxtapose like the mirror image of a mountain in a still lake on a clear day. Wherever one goes, the other is equally opposite. (more…)