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.
Now think about market rules. Every initiative undertaken by regulators in the past 15-plus years has aimed to evacuate unique, valuable information – it’s basically a crime now to possess it (but possessing pot is not) – and reduce trading costs – the exact opposite of ideal conditions for investment. Brokers report routing practices and whether they deliver “best execution.” Exchanges offer blandishments if brokers “furnish liquidity.” Trades match in milliseconds.
And yet brokers have four days to clear trades.
What Benjamin Franklin Gates’ saw through the magic spectacles led him to untold wealth and riches – a lost treasure.
You’re seeing it too (it’s indeed a “lost treasure” for long-term money). The answer? Everyone is trading for yield – not just the missing 25%. But because it happens every day, the apparent change in ownership is like the apparent change in price: Nominal.
But it’s not. The truth is right in front of us: The return in a month in that one stock, captured perfectly, was 62%. In 3.1% increments.
Who’s doing that? We have barely more national-market stocks than we did in 1971 – about 600 more. But we have 1,500 exchange-traded products, up from none ten years ago, and global 24-hour trading.
Look at rules and compliance. The rules are working. Everybody is complying, save for the occasional small exception.
So the truth is, everybody is doing it. Even those 25 who seem never to move. You just don’t see it because your vantage point is wrong. You’re not using your Magic Market Structure Spectacles.
PS – Johnny Manziel won the Heisman! Just as we hoped, imagined, in last week’s Market Structure Map.