August 13, 2014

Buy the Rights

Know the song by OMC?  Jumped into the Chevy. Headed for big lights. Wanna know the rest? Hey, buy the rights.  How bizarre, how bizarre…

The market-structure mashup recently took a somewhat bizarre turn. InterContinental Exchange, owner of the NYSE, bought the rights to high-speed trading patents.

Said David Goone, ICE’s Chief Strategy Officer: “ICE acquired these patents with the goal of preventing third parties from using these intellectual property rights against our customers. ICE intends to make these patents available broadly for license to customers that provide beneficial liquidity in ICE’s and NYSE’s markets.”

ICE says the patents are for an automated trading system that makes pricing and trading decisions based on market-price information, and the associated intellectual property covers electronic trading in both derivatives and stocks.

What makes it odd at first blush – but certainly clever – is ICE’s opposition to high-speed trading. “You shouldn’t pay people to trade,” ICE CEO Jeff Sprecher said in October 2013, voicing dislike for the system where exchanges pay brokers for trades that create liquidity attractive to orders from others. To oppose high-speed trading and then buy patents customers can use to bring high-speed liquidity-producing trades to the NYSE seems smart but contradictory.

What makes the move clever on ICE’s part is that instead of grousing about market conditions, they bought patents. It’s a tech company tactic that runs thinking circles around the moseying, ambling, regulatory clique in equity markets.

Citi yesterday made Bloomberg headlines by calling for a reduction in access fees at exchanges. Sprecher too has advocated lower access charges, the fees brokers generally pay to buy shares at exchanges.

But one wonders why they don’t simply cut their fees then?  IEX, the exchange started by RCB alums and celebrated in Michael Lewis’s book Flash Boys charges 9 cents (30 cents is the regulatory maximum) to trade a hundred shares and pays no market-making incentives to customers.  But IEX has less than 1% of market volume.

Okay, you say from the IR chair. What’s it mean to me? The debate about the function of the stock market is in full, heated swing. If there was ever a time for issuers to ask for full and timely disclosure on which brokers trade shares and who holds long/short positions, now is the time.

And there’s a corollary that requires a moment of reflection for IROs and executives. Public companies “tell the story” to investors.  What are you marketing?  At the trading desk, which is where the money meets, you’re selling a product.  What’s the supply of your product in the marketplace and who’s consuming it? Basic questions in any other market.  I know who’s consuming the ModernIR product to the dollar.

When the product – your shares – fluctuates wildly in price, we assume it’s because of something people understand or don’t about the story. I assure you, that’s rarely the case. It’s almost always about market structure. Share supply and demand, and who’s affecting it.  Tracking the product is a basic part of the IR job today – yet while ICE buys patents for traders, no exchange  offers to issuers a single model for measuring which behavior sets your price (good thing we do!).

If public companies want to know the rest, they need buy no rights to halt the bizarre practice of leaving companies out of structural debates.  How the market works for the product IR conveys – your shares – ought to be a top priority in the C-suite.

Another golden opportunity for IR looms!

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