February 24, 2021

Maxine Waters

I knew it would come to this. Rep. Maxine Waters would be on CNBC talking about market structure.

Last week during options expirations, Congress paraded supposed culprits in the Great Gamestop Mania before itself.  And it wasn’t about financial misdeeds, somebody leading shareholders astray. No, it was about MARKET STRUCTURE.

What’s market structure?  The behavior of money behind price and volume, in context of rules.  What makes stocks tick.  How the market works.  Pick your thing.  But it’s got nothing to do with STORY.

The stock market is driven by supply and demand, which are largely governed by rules and machines.  Scrawl that on a mirror.

And Investor Relations in 2021 should be about advising the executive team and board on valuation, strategy, uses of shareholder capital, and capital-formation in this market.

That’s a lot bigger job than “telling the story.”  The story doesn’t directly connect to the supply or demand in your shares and what drives both.

GME didn’t go to $483 because of high short interest.  It skyrocketed because market structure enabled demand far larger than the availability of actual, physical shares to be accommodated at ever-higher prices.

Sure, in the process hedge funds short GME on a rational basis were nearly bankrupted. Had the supply of GME been limited to its shares outstanding, the price would not have risen so high.  Why? There would have been nothing left to buy. If you can’t buy it, the price can’t rise.

Right now, short interest says IFF is the most shorted stock in the market.  But it’s NOT the most shorted stock.  I’ll explain.

IFF Short VOLUME, the part of supply dependent on borrowed stock, has been close to 70% for more than 200 trading days.  Trading machines will find stocks with a predictable propensity to rise or fall.

What’s more, as we’ve explained before, market makers, a fancy name for the person at the airport taxi stand you don’t need who hails a cab for you from the line sitting right there, can manipulate supply and demand by creating shares out of thin air.

Traders, you can never, ever, ever beat them.  Because the regulators said so.  What do we mean?  Well, that market makers are exempt from the rules that apply to you.  It means you can’t win, and it means there isn’t a uniform rule, uniform justice. Why is that okay?

Public companies, the regulators and the rules favor the machines.  So while you spend over $5 billion annually complying with rules, and much more trying to get “governance” and “targeting” right, we might get more purchase, so to speak, from that money by spending it lobbying Congress to make the market fair for us.

So.

What’s really the most shorted stock?  Screening out ones that hardly trade, it’s PRO.  It’s 86% short.  Least shorted is PNM, in a big green deal (good name for a rock band) with AGR.  PNM is 7% short — that is, of its trading volume, a tenth of IFF’s.

Knowing these facts is also part of investor relations in 2021.  And trading stocks.  In the same way that knowing what made your company better fundamentally was key to the job, so now is knowing your characteristics.

Traders, it’s the same as knowing it was time to leave TSLA Jan 22.  You can always come back when TSLA market structure turns.  And if Maxine Waters is asking questions, you should be in cash.

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