June 2, 2021

Rewards of Risk

Investor relations involves risk.  And that’s good. 

Don’t you mean investing involves risk, Tim? And why is it good?

Well, yes, investing is a risky endeavor. But I mean the role of “investor relations,” the liaison to Wall Street at public companies, requires taking risk.

It’s not a “yes” job.  You’ll need the courage and occasional temerity to tell your executive team and board what each needs to understand about the equity market – and occasionally what not to do.

Time would fail me to tell you about all the times I’ve had conversations with IR folks who say, “I’m not sure my Board is willing to….” Pick your thing.

In my case, it happens when I explain that 10% of trading volume is rational stock-picking.

Some recoil in horror.  What am I going to do if the executives know 90% of our trading volume is something we can’t control?

If they don’t know, you’ll face unrealistic expectations.  Considered that possibility?  If your board and executive team don’t know how the stock market works, is that a good thing or a bad thing?

We’re still getting to what’s good about risk.

It’s our job to know how the stock market works and to be able to articulate what’s controllable and what’s not. Take the so-called meme stocks like AMC.  I credit AMC leadership for raising capital while the market embraces the stock.  They didn’t make the rules that permit crazy trading. They’re adapting.

And do you know how a stock with 450 million shares outstanding can trade 650 million in a day?  Yes, Fast Trading, in part.  Machines moving the same shares over and over.

But the big reason reaches back to the basics of how today’s stock market works under contemporary rules.  All shares must pass through a broker-dealer. All stocks must trade between the best bid to buy and offer to sell.  And all brokers who are registered to trade stocks must make a minimum bid and offer, both, of 100 shares.

Well, what if there aren’t 100 shares available?  There are no appliances available to install tomorrow in your house.  The electrical market is running out of GFCI outlets. Sherwin Williams is running out of paint.  You may not be able to get a load of lumber.

Yet somehow, magically, there is always 100 shares of your stock for sale. 

It’s not magic. It’s rules.  Rules require brokers and stock exchanges to connect to each other electronically. If they’re registered and not using “Unlisted Trading Privileges” to bid or offer rather than do both, brokers must commit to 100 shares each direction.

Well, it’s impossible. There aren’t 100 shares of everything available at every moment without artificial intervention.

So the SEC let’s brokers create shares under Rule 203(b)(2), the market-maker short-locate exemption, in order to assure 100 are always available.  Well, technically they’re shorting it without having to locate it.  Those trades have to be marked short.  And AMC has had short volume of 50-60% of total trading for two weeks running.

Brokers are manufacturing stock. That’s how the meme stocks scream. Brokers are selling buyers shares that don’t exist. If you’re in the IR profession, should you know these things?

So, why is risk good?  Mitch Daniels, President of Purdue University and ever a ready source for well-turned phrases, told graduates last month, “Our faculty has determined that data analysis, as we now call it, should be as universal a part of a Boilermaker education as English composition.”

We IR people are good at English composition. We need to be great at data.  Because, quoting President Daniels, certainty is an illusion. Just like those shares of AMC, and a swath of the whole market.

But leaders offer the capacity to understand the knowns and unknowns and make confident choices and recommendations.

I think data analytics are as vital to the IR job now as knowing Reg FD and Sarbanes-Oxley. The market translates our companies into digital value.  We need to understand it.

Otherwise we’ll be too fearful to lead our execs and boards boldly through the market we’ve got today.  Sure, there’s risk.  But the rewards of bold leadership never go out of style.  And we need that now more than ever.

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