Tagged: trades

Data to Know

What should you know about your stock, public companies? 

Well, what do you know about your business that you can rattle off to some inquiring investor while checking the soccer schedule for your twelve-year-old, replying to an email from the CFO, and listening to an earnings call from a competitor?

Simultaneously.

That’s because you know it cold, investor-relations professionals.  What should you know cold about your stock?

While you think about that, let me set the stage. Is it retail money? The Wall Street Journal’s Caitlin McCabe wrote (subscription required) that $28 billion poured to stocks from retail traders in June, sourcing that measure from an outfit called VandaTrack.

If size matters, Exchange Traded Fund (ETF) data from the Investment Company Institute through May is averaging $547 billion monthly, 20 times June retail flows. Alas, no article about that.

You all who tuned to our Meme Stocks presentation last week (send me a note and I’ll share it) know retail money unwittingly depends on two market rules to work.

Illustration 91904354 / Stock Market © Ojogabonitoo | Dreamstime.com

This is good stuff to know but not what I mean. Can you answer these questions?

  • How many times per day does your stock trade?
  • How many shares at a time?
  • How much money per trade?
  • What’s the dollar-volume (trading volume translated into money)?
  • How much of that volume comes from borrowed stock every day?
  • What kind of money is responsible?
  • What’s the supply/demand trend?
  • What are stock pickers paying to buy shares and are they influencing your price?

Now, why should you know those things?  Better, why shouldn’t you know if you can? You might know the story cold. But without these data, you don’t know the basics about the market that determines shareholder value.

Maybe we don’t want to know, Tim.

You don’t want to know how your stock trades?

No, I don’t want to know that what I’m doing doesn’t matter.

What are we, Italians in the age of Galileo? What difference does it make what sets price?  The point is we ought to know. Otherwise, we’ve got no proof that the market serves our best interests.

We spend billions of dollars complying with disclosure rules. Aren’t we owed some proof those dollars matter?

Yes.  We are.  But it starts with us.  The evidence of the absence of fundamentals in the behavior of stocks is everywhere.  Not only are Blackrock, Vanguard and State Street the largest voting block for public companies and principally passive investors, but the majority of trading volume is executed by intermediaries who are not investors at all.

Stocks with no reason to go up, do.  And stock with no reason to go down, do.  Broad measures are not behaving like the stocks comprising them.  Over the whole market last week, just two sectors had more than a single net buying day:  Utilities and Energy. Yet both were down (0.9%, 1.3% respectively). Somehow the S&P 500 rose 1.7%.

You’d think public companies would want to know why the stock market has become a useless barometer.

Let me give you two examples for the questions I asked.  Public companies, you should be tracking these data at least weekly to understand changing supply/demand conditions for your shares.  And what kind of money is driving shareholder-value.

I won’t tell you which companies they are, but I’ll tweet the answer tomorrow by noon ET (follow @_TimQuast).  These are all 5-day averages by the way:

Stock A: 

  • Trades/day:  55,700
  • Shares/trade: 319
  • $/Trade: $4,370
  • Dollar volume:  $243 million
  • Short volume percent: 51%
  • Behaviors:  Active 9% of volume; Passive, 36%; Fast Trading, 32%; Risk Mgmt, 23% (Active=stock pickers; Passive=indexes, ETFs, quants; Fast Trading=speculators, intermediaries; Risk Mgmt=trades tied to derivatives)
  • Trend: Overbought, signal predicts a decline a week out
  • Active money is paying:  $11.60, last in May 2021, Engagement is 94%

Stock B:

  • Trades/day:  67,400
  • Shares/trade: 89
  • $/Trade: $11,000
  • Dollar volume:  $743 million
  • Short volume: 47%
  • Behaviors:  Active, 8% of volume; Passive, 24%; Fast Trading 49%; Risk Mgmt, 19%
  • Trend: Overbought, signal predicts declines a week out
  • Active money is paying:  $121, last in June 2021, Engagement is 81%

The two stocks have gone opposite directions in 2021.  The problem isn’t story for either one. Both have engaged investors. Active money is 8-9%.

The difference is Passive money. Leverage with derivatives.

Would that be helpful to boards and executive teams?  Send this Market Structure Map to them.  Ask if they’d like to know how the stock trades.

Everybody else in the stock market – traders, investors, risk managers, exchanges, brokers – is using quantitative data.  Will we catch up or stay stuck in the 1990s?

We can help.

Gaffes and Spoofs

You all remember the Fat Finger?

It’s a gaffe, trading-style.  In one 2014 instance, if the record can be believed, somebody in Japan accidentally tried to buy $700 billion of stocks including more than half the total outstanding shares of Toyota.

The trades occurred outside hours and were cancelled but the embarrassment lingers.

Do you know of Harouna Traoré?  A French day trader learning the ropes, Mr. Traoré plunked down twenty thousand euros at online platform Valbury Capital and, thinking he was in simulation mode, began trading futures contracts.

Racking up a billion euros of exposure and about a million euros of losses before he realized his error, the horrified trader said, according to CNBC, “I could only think of my family.”  But the intrepid gaffer – so to speak – soldiered on, turning one billion and losses into five billion and profits of about twelve million euros.

I don’t know how it turned out but not well, it appears. The Chicago Mercantile Exchange sanctioned Mr. Traoré in June 2020 for exceeding credit thresholds, and banned him from trading for two years.

The Fat Finger has become reliably rare in US markets, thanks to security protocols.  It’s improbable we’ll again see a Knight Securities buy $4 billion of stock in 45 minutes and be forced to liquidate to Getco as happened in 2012 (Getco is now Virtu).

That’s the good news. The bad news is bizarre moves in equities such as we’ve seen in 2020 are therefore not due to gaffes.

But they could be spoofs, legal or otherwise.  JP Morgan yesterday agreed to a $920 million fine related to spoofing in futures contracts for metals and US Treasurys.  I can’t recall a larger trading fine.

Spoofing is the deliberate act of entering orders to trade securities and then cancelling them, creating, at least momentarily, the artificial appearance of supply or demand.  Dodd-Frank outlawed spoofing after tumult in the 2008 crisis, and regulations for commodities and stocks have subsequently articulated guidelines.

Investors and public companies alike don’t want fake liquidity in markets. As gaffes do, it’s what causes unexpected lurches in prices – but on purpose.

We can all sleep well, then?

Nope.

Turns out there is illegal spoofing, and legal spoofing.  The SEC’s Midas data platform shows trade-to-cancel ratios for stocks in various volume and market-cap tranches.  Generally, there are about 15 cancellations for every executed trade in stocks.

In Exchange Traded Funds (ETFs), the ratio explodes. The gaps or so severe between quartiles and deciles that an average is difficult to find. But the rate ranges from about 100 to nearly 2,000 cancellations for every completed trade.

Well, how is that not spoofing?

Answer: If you use order types it’s legal. It means – broad definitions here – that Fill or Kill (do it at once or don’t do it at all), Limit/Stop-Loss, All or None (no partial fills, the whole thing or nothing), Iceberg (just a little showing and more as the order fills) or Passive (sitting outside the best prices) orders are sanctioned by the government.

Tons are cancelled. Layer your trades with a machine instead, and it’s illegal.  Spoofing.

Wait a minute.

Order types through a broker are trades in the pipeline. Systems know they’re there. Risk-management protocols require it.  If the orders are at retail firms that sell their trades, then the high-speed buyer sees every layer before it reaches the market.

See the issue?

The market is stuffed with legal cancelled orders – that somebody else can see before the trades execute and who will therefore clearly know what the supply/demand balance is, and what gets cancelled.

I’m not sure which is worse, a fat finger, or this.  The one is just an accident.

Now, why should you care?  Because stocks are awash in compliant spoofs.  Regulators are trying to sort, one from the other, the same kind of activity, except one lets somebody else know ahead of time that it’s there. And that’s fine.  Sanctioned.

If you trade on inside information, data you obtained that others don’t know, in exchange for value, it’s illegal. Well, trades sold to high-speed firms are exactly that, if only for a fraction of a second.

If ETFs are peppered with cancellations at rates dwarfing trades, and money is piling into ETFs, would it be good for the public to know? And why mass cancellations?

Because ETFs are legally sanctioned arbitrage vehicles. That’s another story.

The good news is we track the behavior driving arbitrage.  Fast Trading.  We know when it’s waxing and waning. It imploded into today’s futures expirations – where much spoofing occurs, legally – and just as Market Sentiment turned dour.

I hope there are no gaffes.  Spoofs will abound.  Authorities will pat themselves on the back.  It’s a weird market.

***

By – Tim Quast, President and Founder, ModernIR

Crumbling Quotes

Terra firma. In Latin, “solid earth.”

Two thousand years ago people thought Latin would be the lasting language of commerce. History disproved that thesis, but the notion of a firm foundation remains. In stock-trading, however, the ground relentlessly crumbles as prices shift in illusion.

The significance of this condition goes beyond whether investors are getting fair prices. Iconoclastic IEX, the alternative trading system and prospective exchange introduced popularly in Michael Lewis’s book Flash Boys, has a solution. More on that in a moment.

Many don’t think there’s a problem. Costs are low, we’re told. Apparently stocks trade easily. But the success measures themselves are incorrect. Clear supply and demand, identifiable participants, differentiated price, service and products – these are hallmarks of free-market function. The buyers and sellers who benefit from low spreads are those whose minds are always changing.

The stock market today forces competitors to share products and to match each other’s prices. Most observable prices come from parties aiming to own nothing by day’s end. Quotes reflect seismographic instability. Nobody knows real supply or demand because 42% of traded shares are borrowed and by our measures 85% of market activity is routinely motivated by something besides rational thought. Half the volume flows through intermediaries who take great pains to remain anonymous. Imagine walking into a shopping mall full of storefronts without signs. You’d feel like you were frequenting something illegal, chthonian.

The eleven registered exchanges and 40 alternative systems comprising the National Market System are in competition with each other no differently than Nordstrom and Saks, but no law requires Nordstrom to point customers down the concourse because a marquee posting best prices says it must. In free markets, humans compete on merit. If you want a good deal cut out the middle man. (more…)