June 28, 2017

Long and Short

Here’s a riddle for you: What’s long and short at the same time?

Your shares, public companies (investors, the shares of stocks you own too).  You saw that coming, right.  The problem is you don’t know who’s long or short.

Let me rephrase that. You can know in 1975 fashion who’s long.  That year, Congress required investors to report holdings, amending the Securities Exchange Act with section 13F.  Investors with more than $100 million of assets had to report positions 45 days following quarter-end.  Back then, investment horizons were long.

The problem is we have the same standard. Why? Bigger question: Why aren’t more companies asking?  After all it’s your market. You deserve to know who owns your shares, who’s long or short, and where your shares trade.  You also should know what kind of money trades them since a great deal of your volume is for the day, not owned (this part we’ve solved!).

Back to ownership, Exchange Traded Funds post positions every day by law. Why doesn’t everybody else?

“Quast, come on,” you say.  “Investors need some time to buy and sell positions without everyone knowing, if they’ve got longer horizons.”

We’re market structure experts. I can assert: nearly every time investors try to buy or sell in the market, traders know it. That’s why we measure what traders know instead of considering them “noise” like everybody else.

Fast Traders detect buying or selling, often before it happens. I liken it to driving down the road on cruise control. Your exit is coming up so you tap the brakes or take your car off cruise.  Anybody behind you can conclude you’re planning to exit.

Fast Traders observe how behavior slows. It’s how we knew June 5 that the tech sector was about to decline. And they see algorithms accelerating to merge onto the freeway. There’s a buyer. Let’s start lifting the price.  We observe all this in patterns.

Back to the point. If the problem with disclosing positions is a desire to protect investment plans, why is the most popular investment vehicle of our era, ETFs, doing it?

“Those are models,” you say. “They track benchmarks.”

Yes, but all over this country boards and management teams are getting quarterly shareholder reports from 13Fs and concluding that these investors are setting prices.  They’re inexcusably out of step with how markets work.  Isn’t that our profession’s fault? It’s part of the IR job to inform management about equity drivers.

Congress is trying to inform itself. We don’t want to be trailing Congress!  Yesterday there was a big hearing about equity market structure in the House Financial Services Subcommittee on Capital Markets.  They like long titles, you know.

Thanks to good friend Joe Saluzzi of Themis Trading, who testified live – read what he said – we were invited to offer written testimony from an issuer perspective on the state of markets and what would help issuers have fairer and more transparent participation.

It’s the first time ModernIR has been read into the official congressional record and I don’t whether to be elated over the opportunity or melancholy that it’s necessary.

You should read it. It’s how the market works today. In fact, read all the testimony. They say what we write here every week. Everyone’s in the know but the issuer community.

You deserve better, public companies. It’s your market and you’re excluded by those merchandising your shares from having a say in how it functions.

We made three simple proposals:  Move 13Fs up to monthly reports (we didn’t call for daily info!) and make them both long and short.  It’s been proposed before. Maybe this time we’ll get someplace.

We also proposed daily disclosure of trading data by broker. There’s no reason Fast Traders or anyone should be able to hide. Canada requires disclosure. Why do we have a lesser standard (none, in fact)? And we asked Congress to direct the SEC to form an issuer advisory committee so companies have a voice.

What’s central and imperative to this effort at better transparency for the IR job and the management of public companies?  Knowing how the market works.  We’re experts on it. That we were asked to offer an issuer perspective – nobody else from IR was – speaks to it.

The starting point is learning market structure. It’s a core part of the IR job in today’s market.  That’s the long and short of it. Ask us and we’ll help you help your executives.

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