January 26, 2022

No Excuses

There’s no excuse. 

It’s 2022.  Not 1934, when Benjamin Graham wrote Security Analysis.

Back then, the timeless notion of buying profitable companies with undervalued growth opportunity took firm shape. But its interpretation would have to be shaped by the Securities Acts of 1933 and 1934, which birthed the SEC and part of the market’s structure that prevails still.

In 2022, the stock market has been operating under Regulation National Market System for 15 years.  Anybody in the stock market – investor, trader, public company – who doesn’t know what Reg NMS is and does is without excuse.

And any company reporting financial results during options expirations is without excuse. Like NFLX. Shareholders should rightly be upset.  There is no excuse for a public company to be ignorant of market form and function in 2022.

Monthly options expirations. Illustration 23855600 © John Takai | Dreamstime.com

Isn’t that a bit harsh, Tim?  No excuse? 

It’s been 15 years. We’ve watched meme stocks. Surges and collapses in prices. No connection to reality.  And we’re here to help you. You need not go through an NFLX experience.

Here’s some perspective. In 1995, well before Reg NMS when Yahoo!’s earnings call was an event attracting tens of thousands of retail investors as CEO Tim Koogle, who called himself “the adult supervision,” discussed financial performance, you didn’t need to worry about the options calendar. Options trading was a blip on the equity radar.

The goal then was to show you could close the books fast.  Koogle and team reported Q4 outcomes within ten days of year-end.  Remember that?

Today, the daily notional trading value in options is greater than the dollar-volume of stocks.  The latter is $600 billion. 

Derivatives comprise close to 20% of all market-capitalization. Derivatives are a right but not an obligation to do something in the future.

Suppose, public companies, that 20% of your sales at any given moment were a bet – a possibility but not a certainty.  You’d have to account for that when setting internal and external expectations for results. Right?  That’s very material.

And that’s the stock market.  If 20% of your value depends on something that might not happen, should you take that into account?  And are you irresponsible if you don’t?

I don’t know this stuff, you say.  Well, learn it! It’s a primary part of the investor-relations job in 2022. The calendar is here, and here, and here and here. It’s public information.

And we can help you measure and understand behaviors and see what the money is doing BEFORE you report results, before expirations.

Options expire all the time, but the RHYTHM of the stock market moves with monthly expirations.

Weeklies are too short a timeframe for indexes and Exchange Traded Funds that use them for substitutes, too unstable for the market-makers driving colossal trading volumes to keep ETFs aligned with underlying stocks – while profiting on directional options plays.

In 1995, most of the market’s volume tied back to the 90% of institutional assets that were actively managed.  For NFLX, between Dec 1, 2021 and Jan 24, 2022, Active money averaged 9%of daily volume.

Eighteen percent of volume tied to derivatives, which expired last week as NFLX reported financial results.  And 55% of NFLX trading volume is driven by machines that exploit price-changes and want to own nothing.

Fast Trading.  High Frequency Trading. Whatever you want to call it.  Firms that are exempt from having to locate shares to short, under Reg SHO Rule 203(b)(2).

Investor Relations Officers, it’s your job to know the market’s risks and advise your executive team and board on how best to maximize shareholder value and minimize risks to shareholder interests.

Shareholders should, can and will expect it of you, public companies. You shepherd money, time and resources belonging to other people.

MSFT is reporting on the RIGHT side of expirations. Same with IBM.  Doesn’t mean stocks aren’t volatile with new options. But they haven’t time-decayed yet. Bets are much more expensive.

Yesterday was Counterparty Tuesday when banks squared the books on wins and losses related to last week’s January derivatives and the new February derivatives that traded Monday and prompted one of the epic 21st century trading days.

Don’t report results in the middle of that.

Oh, we have an internal calendar from the General Counsel. Well, tell the GC to change it!  Stop acting like it’s the 1990s.  It’s not.

Your priority, your job, your responsibility, is to be an informed participant in 21st century American public equity markets.  To your credit, IR community, a meaningful part has adapted, changed behaviors, learned how the market works.

If you’re ready to drag your executive team into the 21st century, tell them there’s no excuse.  It’s time to change behavior, reduce risks for shareholders. Come join the market structure family.

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