Whatever you write, do it as though somebody will read it back to you in a court of law.

I can’t recall who passed that gem along to me. I’ve never had to experience it, thus far. Maybe because I follow it.

Anyway, with that backdrop I’m sharing my conversation last week with Jamie Selway, head of Trading and Markets for the SEC.

Mr. Selway is a longtime market structure – my forte – authority, having among other things founded White Cap Trading and sold it to ITG.

I’d reached out to him about our Proactive Passive Strategy – our plan to help companies adapt to quantitative markets by among other things sharply rethinking earnings processes to reflect today’s market.  

One problem is mushrooming post-Pandemic earnings volatility. Hedge funds place massive wagers outside market hours, which cause portfolio tracking errors that prompt Passives to avoid or sell those stocks.

I said, “I don’t see any legal or regulatory stricture on what we’re thinking. Do you?”

We discussed it. He said, “Let me kick this around with CorpFin and come back to you.” 

He means the division of Corporation Finance run by Jim Moloney.

Mind you, I asked Mr. Selway what parts of our conversation I could share.

“Any part you like,” he said.

He said, “We also agree that it’s an interesting and timely question, and we encourage you to raise it in whatever forum makes sense.”

This is a forum. What’s the question? How and when you should report earnings. I’ve spent a lot of time on this topic with the exchanges, Finra and execs of public companies. 

And we’ve accumulated a lot of data on outcomes.  If you want to know more about what we’re recommending, ask us. 

I’ll say simply this: The stock market is not full of stock-pickers. It’s full of machines, derivatives, bets, models. In the last twelve months, Active Investors had outflows of over $400 billion, a 15-year trend.  Passives add a SpaceX IPO of assets every month.

You can’t talk to Passives. You CAN deliberately craft the product they seek. 

Because you adapt or die. Like Danny DeVito’s bit on buggy whips (my good friend Kevin reminded me!). 

Technology changes. The nature of investment management changes.  If we don’t keep up, we cease serving as effective fiduciaries for shareholders, public companies. 

Bluntly, why would we be doing today the same thing that we did in 2000 when Fidelity Magellan was the biggest investor?

Now, passive dominance is nearly total. Say the folks at The Institute of Business and Finance. Read it. 

Yes, you need a Story strategy. We measure Active money and its market-share of volume, its behavioral patterns. Often, it tracks Passives now because that’s the elephant in the room. You gotta have performance to compete.

And as IBF notes, the four remaining Active funds in the top 20 have earned it (from Fidelity, Vanguard, Dodge & Cox, T Rowe Price) with returns. But they cost on average nine times more than Passive funds.

You also need a product strategy for Passives.

I don’t like Passive dominance, or that machines price everything, or that arbitrage proliferates or that the very day SK Hynix listed its ADR in the US market, a half-dozen leveraged SK ETFs began trading.

It’s a lousy market for capital-formation, a key reason most IPOs fail. It would be better to instead sell to a public company for stock than IPO, because M&A strategies turning midcaps into megacaps are giving Blackrock et al more of the “product” they need.

And that 14 stocks are $36 trillion of market cap, breathtaking concentration, is a consequence of pervasive Passive investment that needs size, stability, liquidity (over earnings). At some point, there will be a reckoning.

And you can see every trading day how the market has become a binary play. At any inflection point – a reset to options, a change to flows, monetary events, macro data – the DJIA might move opposite the Nasdaq, with the SPX wavering between them.

Why?

Because the stock market is a bet on options vs equities. The DJIA is Low Volatility as a product. The Nasdaq is Momentum as a product.

So the Nasdaq can be way up, the DJIA down, until movement in both assets and options leads to convergence. The trade reverses, then mean-reverts. This is a relentless daily metronome in stocks, powered by flows.

When flows slow, it ends. And we’re at one now, with options resetting Thursday through next Wednesday.

The data show flows have slowed, no matter how yesterday’s soft CPI goosed banks. UNLESS CPI data shook up models and boosted flows, the market is poised for an unexpected breakdown.

The conclusion? These are facts you can’t ignore. You need deliberate tactics to drive shareholder value now (equal weight S&P 500 was down yesterday, not up).

So.

Public companies, let us help you focus on being boring. It’s the secret to exciting returns.  Investors, same thing. Don’t trade price. Trade Demand and Supply. You’ll never again wonder what’s happening.