February 17, 2016

Bieber in a Bottle

Volumes are big but trades are small as markets pitch and buck.  On this restless sea, is there a message in a bottle?

That would seem poetic, were literature a help to your CFO in a stock market seeming the same hot mess as Justin Bieber’s Grammy performance Monday night. And what exactly was Kendrick Lamar doing?

If you didn’t see the Grammys, never mind. Back to US stocks, volume daily is leviathan, approaching 10 billion shares that as we noted last week must ionize through fewer than 20 firms on the way to sea spray. Markets last broke so furiously upon the shoals in August 2011 when it seemed the Euro might collapse (which begs that question anew and again leaves it unanswered).

Is it sound or just fury? Amid steep losses shifting to sharp gains into February options expiring today through Friday, trade-sizes have shrunk to the smallest on record.  TABB Group, the market structure consultancy, says average shares per trade in equities was of late 202 shares, dipping from the previous all-time low of 203 last October as markets surged like war from the trenches of August.

Conventional wisdom holds that blocks mark bigs. We’re told whales move in schools. But wait. The buyside and sellside have spent billions on trading technologies to make buying look like selling. The purpose of algorithms is deception.

Let me repeat that:  The purpose of algorithms is deception. Looking for blocks or watching the buy/sell balance means missing the technological revolution in trading the past fifteen years. At ModernIR, we preach a behavioral gospel.  All money is not the same. All prices are not equal.  The purpose of algorithms is deception (repetition is the best form of emphasis). Exchanges sell data, not products.

Against that backdrop, one key to understanding why stock-prices shift is recognizing that the market is not comprised of one behavior.  Suppose you were at the Super Bowl. Would you expect every person in the stands to act the same or might you anticipate bifurcation? Some portion of the audience will be rooting for one team and silent when the other excels. The weighting on sides determines the size of the roar and the silence.

Apply that to your stock.  The greatest mistake currently committed by executives of public companies is supposing the money in the market is a Super Bowl full of unilateral fans rooting for The Team. Recently I encountered an IR officer convinced that revamping the call script was the reason shares were up with earnings mid-November after falling with the call mid-August. That’s akin to supposing you caused an earthquake by slamming a door (August was China and expirations, not earnings).

There is one concrete fact you can know from big volume and small trades by taking the market at face value: A bidding war is underway. What’s knowable on the surface ends there. The rest resides lower.

You can measure the behaviors comprising your daily volume (this is what we pioneered – and if you don’t know what’s setting your price, you’re doing IR like a caveman).  Google, Amazon, Facebook, parse internet traffic. In the 21st century, companies should be parsing volume into demographic bands (if you think your exchange should be doing it, you’re right but misunderstanding what business exchanges are in).

Measure the market as it is. Because an approving roar may have the same timbre as derogatory boos. The last thing you want is your CFO before the Board like Justin Bieber on stage convinced the noise is coming from fans.

And that is the note in the bottle.

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