ChargePoint (CHPT) traded 44 million shares Sep 3, almost twice its ledger of 24 million, and rose from around $5 to over $9.

Yes, in Dec 2020, it was trading above $900, with market cap over $15 billion versus today’s $250 million. 

How did its shares outstanding trade almost twice over in a day?  Machines. Look at behavioral patterns – something we invented – and the only advancing one was the kind typified by Citadel and Jane Street. Machines traded with themselves and retail “catalyst traders” chasing price. Citadel buys retail orders wholesale and sells them retail.   

I don’t know who won or lost. You can bet Citadel made money since it usually does.  

There are girders to guard against volatility in the stock market that were broadly formed after the May 2010 Flash Crash and adopted in 2013. 

There are Tier 1 and Tier 2 stocks and Exchange Traded Products. Tier 1 stocks are basically Russell 1000 and S&P 500 stocks. The big, liquid kind. And over 1,700 ETFs also now qualify as Tier 1 securities.

Everybody else including CHPT are Tier 2. Second-class citizens? Well. No one calls them that.  But the bands are wider.

A stock like CHPT can’t in theory move more than 10% from the arithmetic mean of its own prices in less than five minutes. If that happens, the stock hits a Limit-Up/Limit-Down set of bands (LULD for short, which I call “lulled”). 

Let me give you an example quoted from the Nasdaq:

Stock ABCD last sale is $4.00 at 9:42 a.m. (double bands) with the NBBO at $4.00/$4.01. Market Maker 2 offers $3.60. A Limit State is now triggered. The Reference Price is $4.00, lower band is $3.60 / upper band is $4.40 (10%). SIP flags banded quotes as a “Limit State Quotation” with a 15 Second Limit State. Market Maker 2 cancels the quote and re-enters a quote at $4.01 and trading resumes.

The “NBBO” is national best bid/offer. The SIP is the “Securities Information Processor” providing the official price to everyone.

The system is intended to prevent anomalies rather than volatility. But it does make the market rapidly reprice. For the record, CHPT didn’t volatility-halt. Machines kept resetting references.

Yesterday, LHSW was LULD halted 13 times. A Chinese company that raises money in the US, it lost 70% of its value descending through LULD repricings (coincidentally, CHPT is up 70% since Sep 3). 

Now what’s all this got to do with you? 

Volatility is the single greatest threat to you, public companies.

Why?  

The money that matters and determines the direction of the market today is driven by models and wants beta, not alpha. The average, not the outlier. In essence it needs big stable liquid things that don’t gyrate.

That aren’t volatile.

Who is that money? It’s dominating your 13Fs now, from Blackrock to Geode to MFS to Norges Bank, to JP Morgan to BNY Mellon. They’re running giant asset-allocation models. They’re big indexers moving everyone to ETFs. 

Whenever there is an ETF creation or redemption basket, two things of equal value are exchanged: A basket of stocks or equivalents (that could be options or cash in lieu) that collectively determine the value of a block of ETF shares to sell to the public.

The exchange depends on price stability. Low volatility.

Let’s say you’re in that basket. Your value in it is established by your reference price from the closing auction.

Then your stock rockets on earnings reported after the close. 

Now, that’s good news for you! For the ETF sponsor who received your stock as collateral for ETF shares, it’s found money, something to cashier. For the market-maker who supplied your stock as part of the basket, you’re a tracking error, a deviation from the reference price.

Put the two things together. In the stock market, stocks halt if prices move away from a reference inside five minutes. 

For ETFs it’s a longer period but the same principle. Continuity in the market depends on predictability. 

Next week I’m on a SEC panel to discuss how this system is going to work, expanded to nearly 24 hours per day, which is coming to our stock market in December.  The good news is there are girders planned for the new overnight session in stock markets.

But you should control what you can. Generally, you’re after institutional holders. Academic data show that trading costs are lowest in the closing auction – which half the public companies skip right past by reporting after the close.

Microcaps are the exception. A relentless and continuous auction in microcaps presents investors with no return handicap. The amounts are tiny.

Now, maybe building a 24-hour continuous auction market will mean a change in institutional behavior. We’ll find out! 

I’m of the opinion that public companies should become what the singer Sade called smoother operators. How do we minimize volatility and maximize the presence of the biggest buyers? We’ve given that a lot of thought.

And that is an exciting new frontier that awaits us, folks.  Stay tuned.