March 2, 2010

Can’t You Be More Positive?

My lovely bride Karen said, “Maybe you should be less negative in the Market Structure Map.”

Only fort-two and I’m turning into a grousing old goat! I doubt many of you would disagree that I’ve sniped about the state of the markets the past few issues. There is method to my madness though. We want investor-relations professionals to be powerful, relevant, informed and cool. We believe knowing market structure is key to coolness.

But what do you do with it? One of our new trial subscribers, a big company you’d know, got its first market structure profile last week. Our systems found rational buying setting price on 2/22. We said, “Was there a reason? News?” They’d met with large institutional investors that day. That’s one use – knowing the real price from the trading and risk-management prices.

But the other crucial thing ties to my apparent glowering. We need to move Boards and management teams to learn how modern trading works and to care about equity markets – which are no place for long-term investors anymore. If everybody trades and nobody invests, in time these markets will have no capital-raising purpose.

You and I can’t change that. But your CEO can. Your Board chairman can speak up. Your independent directors have voices that matter. Right now, matter of fact, Congress is planning a big regulatory push. We’ve already observed a dropoff in rational investment in the data just since November. In some issues, volume is down by more than 40% in four months. But the amount of short-term fluid trading that owns nothing and risks nothing is higher than ever. The solution isn’t eliminating trading. Do that, and there will be no shares trading.

We need instead to revisit the purpose of equity markets. They should match growing, job-creating companies with investors willing to take chances on them. Instead, they’re where you trade stuff in minute, high-speed increments according to mathematical rules. Does that sound healthy to you? If it does, then the regulations coming down are fine.

Speaking of trading, DE Shaw runs runs the Oculus Portfolio, the Dihedral Portfolio and the Razor Portfolio. I don’t mean to pick on DE Shaw. Last week, Fidelity Capital Markets launched new algorithms called T-HAWK, Recoil and Adrenaline, which use real-time market-structure data to identify optimum execution prices. Fidelity also has Darksweep, an undisplayed liquidity aggregator hitting 40 venues. Everybody has similar tools.

Back to DE Shaw, these funds apply “mathematical techniques to identify profit opportunities arising from subtle anomalies affecting the prices of various securities,” to quote part of the firm’s quant strategies description.

It’s what works today. These things are great for ModernIR. Our business is booming. We’ve grown more in the past year than ever before. We can knock on about any door and get invited in.

What yanks my chain is the lack of substance in our equity markets and the way public companies take it without so much as a burp. If intermediaries make all the money, then the market is like insurance: overpriced and inefficient. 

So we hope the growing readership here at The Map helps management get engaged and make a difference.

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