November 5, 2014

Legging It

What are the implications?

Posing that question is a great conversation-starter unless you’ve just asked your teenage son about a substance you’ve found in his room that is not (currently in your state) sanctioned by the government, or if your party is on the long end of an election night.

What if stock orders are implied?  The Fear Gauge, the VIX, a derivatives contract from the Chicago Board Options Exchange, gives traders and risk managers the implications of volatility in the S&P 500.  But that’s not what we mean. Let’s keep going.

The stock market has become so complicated that few can describe how it works now. Many investor-relations professionals and public-company executives say “we just ignore the stock,” implying it’s cooler to act like you’re above it all (even though knowing nothing about any other market you’re responsible for would get you canned).

Chuckles aside, the implication is that it needs simplification. Public glare prompted the NYSE to pronounce earlier this year that it would prune its order types (yet it just launched a new one designed to help high-speed traders sell shares at the NYSE).

Aside: I’m speaking today at the NIRI Kansas City chapter about how the market became something nobody recognizes.

If you buy something at Amazon, the order type is the form you complete with your payment instructions and address that causes what you bought to show up on your doorstep.  This works well.

Suppose Amazon saw your Dell monitor order and paid its Prime members to buy it first and turn around and sell it to you so that it could maintain its ranking as the No. 1 retailer of Dell monitors. It might make no difference to you as a monitor-buyer but now the process has been complicated by factors other than your objective as a consumer.

Welcome to the stock market. Now suppose your order to buy a computer monitor triggered a bet on calls for the QQQ at the Nasdaq and Chinese yuan futures in Hong Kong.  Now you’re starting to understand the market.

If you think I’m making this up, the Nasdaq has asked the SEC to approve what it calls Implied Orders, or Legging Orders.  These mean what you’d expect: If an order comes in that implies it involves more than one thing or has more than one leg, there’s an order-type for that.

The Nasdaq struggles most to post accurate data for its issuers – something we may know more about than anybody in the IR profession – at options-expirations or when there are waves of volatility halts in derivatives, implying that where consumers buy computer monitors at Amazon because they want monitors, trading in the stock market often has implications and legs beyond buying stocks, causing process to displace purpose.

Which brings us back to yesterday’s elections. Whatever one’s political camp, what’s implied is dissatisfaction with how things are being done, which in part is a product of how all of us often ignore what the government is doing.

Public companies have been ignoring the market and maybe considering themselves cool for doing so.  If the market looks like Washington DC now, it might be our own darned fault.  Paying attention is never, ever imprudent.

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