January 23, 2013

Reality or Fantasy

Don’t forget to write your letters, folks!

Which letters? See last week’s Market Structure Map on prompting the NYSE or the NASDAQ to file a rule for better data.

Speaking of rule-filings, here’s an example. Last week ahead of an SEC review deadline, NYSE Arca, an automated facility focused on ETFs and global derivatives-trading, withdrew a proposal permitting ETF sponsors to pay market-makers to trade ETFs.

Filed in April last year, the proposal is similar to one from the NASDAQ on which we commented. We opposed it because these plans distort prices and true supply and demand. If you were paying brokers to buy and sell your shares, would your share-price reflect the views of investors or the market-incentive offered by payments to brokers?

At best, it would be hard to tell. Plus, if a party with a financial incentive to create demand for its product can manipulate outcomes for its own gain, it’s sometimes called racketeering when prosecuted criminally. Why would we permit something that in one place is considered criminal to in another one serve as a barometer for market demand?

Despite this logical conundrum, word is that NYSE Arca will reformulate and re-file the proposal. The NASDAQ’s proposal supporting sponsor payments for ETF traders is still matriculating, and the SEC must decide on it by March 8, according to Traders Magazine.

But the point today is the rule-making process. This is how it works. Parties like ETF sponsors lobby the listing exchange for a rule that will help them. The exchange can then craft a solution and put it before the SEC for consideration. Interested parties can weigh in, as we did on the NASDAQ proposal.

This is what public companies should be doing. Focus first on getting good trading data because trading is the end, not the means, now. It matters most. Then move to getting good ownership data. That’s how to make the process work for you.

Why does ModernIR care? On some level, bluntly, we don’t. If you have better data, you may not need us! But public companies are equal constituents entitled to fair treatment and contemporary solutions. So ask for them. See how here.

As for incentives, they’re my beef with Federal Reserve policy too. In effect, the Fed is paying gigantic banks to go out and create prices that don’t reflect true supply and demand (one can hardly blame ETFs for wanting to do the same). The idea is that it will stimulate investment and economic activity.

Well, sure. But it’s not real. Do we want a real world, or a Memorex one? Do we want real markets or a giant global simulator? To me, it’s logical that this should not be a matter of opinion, but of policy. All markets and people should be entitled to a reasonable expectation of residing in reality.

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