June 8, 2016

Busily Productive

“We try not to confuse busy with productive.”

Thus spake the head of investor-relations for an Israeli tech company years ago, and as we wrap the 2016 NIRI National Conference here in June-gloomy but ever awesome San Diego, I recall it anew.

IR for those of you who don’t know is the job that sits at the confluence of the inflow of capital to companies with shares trading publicly and the outflow of information to the buyers and sellers of shares. With investing gaining popularity in the 1960s, companies organized the effort of courting the former and formalizing the latter, and IR was born.

Attracting investors and communicating effectively will remain a bedrock of our profession until the second-to-last public company is consumed by the one giant firm owning everything and in turn owned by one exchange-traded fund leviathan (let’s hope that future never arrives!).

Most IR spending goes to telling the story and targeting investors, the historical yin and yang of IR.  But how are your shares priced?  Do you know?  Is our profession confusing busy with productive?

Let’s review. IR targets investors suited to the story.  We track corporate peers to find areas needing improvement and ways in which we outperform.  I did this too as a telecom IRO (investor relations officer). Your investment thesis defines unique exceptionalism.

Yet trades are measured by averages, indexes and ETFs hew to the mean, and high-speed traders setting prices want to own nothing.  While you’re trying to rise above, all the algorithms are bending your price back to the middle. It’s one reason why indexes beats stock-pickers: Market structure punishes outliers while active money seeks them.

The only NIRI session I was able to attend this year (we’re busying seeing customers, colleagues and friends during the conference) was a tense paneled polemic (moderated adroitly by one of our profession’s scions, Prudential’s Theresa Molloy) with IEX, hero of Flash Boys with a June 17 SEC deadline on its exchange application, and incumbents the NYSE and the Nasdaq.

Without offense to our market-structure friends at the exchanges, it’s stunning how the legacy firms lobby to preserve speed. Here’s what I mean. When the NYSE and the Nasdaq savage IEX for suggesting that slowing prices down by 350 microseconds is unfair, they are bleating a truth: Their dominance depends on privileges for fast traders.

I’ll reiterate how the market works:  Exchanges don’t aggregate supply and demand, they fracture buying and selling by running multiple markets rather than one. Suppose Nordstrom at the mall split into three stores located at either end and in the middle, with different products in each.  It would inconvenience shoppers, who would have to buy clothes one place and then troop to the far end for shoes. But if Nordstrom was selling data on customer patterns in the mall, it would be a great strategy.

Exchanges pay fast traders to set prices.  Prices are data.  Exchanges make billions selling data.  When IEX says it won’t influence the movement of money by paying for prices but instead will match buyers and sellers fairly and charge them both the same price – which none of the other exchanges do – the truth should be obvious to everyone.

It’s this:  Exchanges are deliberately spreading buyers and sellers apart to sell data. Fast traders are paid by exchanges to create great clouds of tiny trades reflecting narrowly separated prices – the exact opposite of the efficiency of size.

Exchanges sell that price data back to brokers, which are required to give best prices to customers, which they can only demonstrate by buying price data and making sure they match trades at averages of these prices, which means the prices are going to be average, which means the entire market is defined by fast traders and averages.  No wonder Blackrock is enormous. The structure serves it better than stock-pickers – IR’s audience.

This is a racket.  You IR folks are running your executives around the globe at great cost telling the story, targeting investors, tracking ownership-change. Yet the market is built on artificial prices intended to generate data revenue. Structure trumps story.

Stop confusing busy with productive.  Again, telling the story will never go away. But learn what sets your price.

We’ve solved that problem for you.  We announced our Market Structure Analytics Best Practices Guide last Friday, and our new Tableau-powered Market Structure Report.  Five Best Practices. Six Key Metrics. Do these and you’ll be a better IR practitioner in the 21st century – and maybe we’ll cease to be gamed when CEOs understand the market. Five Best Practices (drop me a note for our Guide):

Knowledge. Make it your mission to know how the stock market works.

Measurement.  Measure the market according to how it works, not using some metric created in the 1980s. We have six metrics. That’s all you need to know what matters.

Communication.  Proactively inform your management team about how the six metrics change over time so they stop believing things about the market that aren’t true.

A Good Offense.  Use metrics to drive relationships on the buyside. More meetings confuses busy with productive; develop a better follow-up plan.

A Good Defense.  Since markets don’t work anymore, Activism – a disruption of market structure – is perhaps the most popular active value thesis now.  Activists have had 35 years to learn how to hide from Surveillance.  They don’t know how starkly Market Structure Analytics capture their movements.

Let’s stop being pawns. Without public companies the market does not exist. That’s serious leverage.  Maybe it’s time to starting using it.

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