August 29, 2012

Quiet Period

Define irony.

Alanis Morrissette called things ironic in song and was criticized for the apparent absence of irony in her verse.

So is it ironic, or instead coincidental or paradoxical, that the SEC may consider speeding up information by removing the quiet period around IPOs at the same time that many are calling on regulators to slow down trading markets?

You may have seen that Rep. Darrell Issa (R-Calif) called on SEC chair Mary Schapiro to consider revising antiquated rules about information flow around IPOs. Ms. Schapiro seemed to concur in her August (not august) reply to Rep. Issa that change is worth considering. Rules were created to address disadvantage for small investors, then relaxed in 2005 as communications technology advanced.

The implication is that in a Twitter age where everyone can possess the same information (albeit we’re overwhelmed by endless talking and perhaps underwhelmed by actual doing) a quiet period makes sense like a black fly in your chardonnay. Or rain on your wedding day.

And no surprise, social media is at the heart of the matter. Facebook’s retail holders may have been, er, defaced as a result of regulation ill-suited to the kind of markets we’ve got today where word travels fast. If the quiet period goes away ahead of IPOs, can it be far behind around earnings calls? After all, doesn’t the same principle apply?

Irony is an expression conveying the opposite of what it seems. Some of us are guilty of this when we, for instance, say “nice to meet you.” Just kidding.

Which brings us to trading. Statistical arbitrage platform Lime Brokerage is now performing pre-trade risk checks in two-billionths of a second, and your garden-variety trade confirmation at the Nasdaq returns a thousand times faster than the blink of your eye. What’s happened in trading is the social-media equivalent of everybody following everybody else and yammering on about stuff. A lot of it is superfluous (the trading). Much of it is relevant only this instant. It will change tomorrow.

So a constituency has suggested a pause – a quiet period if you will – in trading activity. If we just slowed things down, perhaps sanity would return. Is that a winning idea? That depends on the problem. I would argue that the problem is price, not speed. So long as rules control how the best bid and offer are set for all trades, trade pauses will merely foster arbitrage in other asset classes. Better that we scrap the National Market System.

Regulators wring hands over outdated rules, fearing somebody might be disadvantaged. Yet public companies don’t know who owns their shares and view a fraction of the firms trading them. And still pay large sums for old-line surveillance, invented in the 1980s. Head-scratching, all.

But, apparently, not ironic.

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