February 20, 2019

Best of MSM: Market Structure Matters

EDITORIAL NOTE: We returned last night on a 7-hour flight from Iceland, weighed down with breathtaking photography. As with market structure, there’s too much material to offer more than a snippet at a time.  I wish we could show you everything. It’s the land of fire and ice (we trekked well into the mountains to soak in hot springs). Water pours from glaciers (and we hiked one). And Reykjavik enchants.  As with markets now, Iceland sits atop turbulent plumbing that at any moment can spout like a geyser or volcano. In markets, I returned to see the volatility gauges shaking in the data.  We’ll talk about that next week. This week, let me take you back nearly six years to March 2013: 

“I get out and meet investors. Tell the story. The rest is noise.”

That’s what an IRO I’ve known since the 1990s said last week over a web meeting about Market Structure Analytics.

Speaking of which, we’ll be discussing this notion with two investor-relations officers who make Market Structure part of complete and exciting IR programs at IR Magazine’s West Coast Think Tank April 4 in Palo Alto. Space is limited. If you want to join our conclave, email me for an invitation.

There are three big reasons why telling the story and ignoring the market is a bad idea. First, anybody can do that (I know – I used to do it!). It’s IR measured by setting meetings, which is like monitoring the success of an advertising campaign by counting the ads you’ve run. It’s clerical.

IR is not a clerical function. It’s not about setting meetings. It’s a strategic effort with direct implication to the reason your business exists: To deliver shareholder value. As I once contended with my CFO when I was in the IR chair, if we’re not willing to spend the price of one non-deal road show on tools to measure what we’re doing, then why are we doing it? (I got the tool, by the way, but it didn’t do what we needed…and that’s why Market Structure Analytics exist today).

A decade ago when I was an IRO, rules were swiftly swinging into place that now have transformed trading. Enron and Worldcom and Elliott Spitzer’s contention that research and trading should be separated and an SEC decision to replace vibrant and unimpeded commerce with a National Market System were just flaring like dust devils in plowed Midwest fields. Fundamental investment hadn’t yet been routed from public markets to private equity by the Indy Racing version of equity-trading, and a majority of volume still had bottom-up roots.

Which leads to Reason No. 2 why telling the story and ignoring the market is a bad idea. If we know these things have transformed markets, how could institutional investment behavior not similarly transform? It’s a bit like assessing the climate in Phoenix with the rain gauge you had in Seattle.

Which highlights Reason No. 3 why telling the story and ignoring the market is a bad idea. There’s a better gauge. You don’t have to use a smart phone, but the technology exists. You don’t have to check the weather report before heading up the hill to ski, but you can, and should. You don’t have to guess your way driving around town. There’s GPS.

Business managers measure operations for feedback. IROs should measure the market (as it functions now, not as it did in 1980) for feedback. That technology exists. It’s transformative, exhilarating, to move from guessing to knowing. To see behaviors in living color telling you the risk or reward ahead in your shares.

Few things can elevate IR to a higher strategic plane of value and importance than defining and owning success measures. These become tools that help you command a regular chair in the Boardroom. Yesterday’s measures won’t earn today’s success.

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