April 24, 2013

Enlist Investors

We assume investors know how markets work. What if they don’t?

Patrick Armstrong, new president of the Securities Traders Association of New York (STANY), told Traders Magazine yesterday that the buyside has been absent from the market-structure debate.

What debate? If you joined the IR profession in the past 15 years, you may be unaware that stocks today trade radically unlike any other time in the general history of capital markets. It’s not a technology question. Things change. Machines convert human processes to automated ones. That’s normal.

When steamboats flourished on the Mississippi River, what had been hard – rowing upstream – became an easy ride. Travel took on an aspect of leisure. It moved from essential to enjoyable (air travel has gone the other way, as I was reminded yet again flying yesterday from Denver to Newark). It was still travel, though.

What’s the purpose behind trading stocks today? Don’t listen to what somebody tells you. Look at the data – which you do if you use Market Structure Analytics. The data say that the purpose of trading markets is to move things around for profit. That’s 85% of your volume.

If the exchange listing your shares had told you that the fees you pay would give you access to a bunch of short-term traders moving your shares around so the exchange could profit on data revenues, would it have changed your view of the market?

“I want [the buyside] to tell me their opinion on the direction of our market structure. I believe that those who are for the status quo, those who say everything is fine, are the ones to be wary of,” Armstrong said.

Investors and public companies share a common reticence. They’re not sure how to define what’s wrong. They don’t want to make waves. Yesterday, the Dow Jones Industrial Average jumped 152 points because Germany’s economy showed hints of contraction and yet European governments successfully sold bonds at good prices.

What’s that got to do with your company’s value? And if that’s a reason for stocks to rise, what should make them fall? There are larger issues at work there, certainly. But it’s the same principle: Fundamentals, sound purposes, have been displaced by whim and slosh.

Who speaks to investors more than anyone else? IROs do. When you’re next on the road with your executives seeing holders, ask what they think of market structure. You might be surprised at how little they know (another opportunity for IR to shine – telling holders about market realities).

But what if both you and they have the same opinion and neither of you realizes it? Together, public companies and the investors who own them are a potent force for change.

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