November 21, 2012

Sizing it Up

We’re in Texas for Thanksgiving and it was 85 degrees yesterday as we idled in heavy I-35 traffic halfway to Fort Worth.

I have to share a funny line you might use if your Thanksgiving guests linger long. My step father-in-law said, “As my dad used to say to my mother, ‘honey we’d better head to bed. These people might want to go home.’”

We considered running a “best of” Market Structure Map from last year or the year before at this time, but markets were in a tizzy over the Euro and Greece. I know, it’s redundant.

So here’s one to ponder, IR folks. Traders Magazine reported Nov 19 that the Nasdaq is ending a bid at its PSX market to draw larger stock trades by ranking size over arrival time.

It was a bold move. In markets dominated by statistical arbitrage and tiny trades, what about a place where size trumps speed? Launched in September 2010, it lasted two years. Size didn’t matter – and yet 50% of trades in the largest 1,300 stocks occur in the dark, folks from the exchanges now say.

It’s disappointing. You want to see a market for investors work. As a guy running a shop performing statistical analysis on trading activity, I’ll tell you why I think it failed. There’s just not enough investment. The bifurcation between dark and lit markets occurring in large stocks is more about statistical arbitrage than finding size. We have a market suited to trading, not investing.

You can’t change out the spark plugs, or whatever, and fix a broken chassis. You can’t get the football team and the volleyball players onto the same playing surface for two entirely different games. Well, you can. But somebody’s going to leave in a hurry.

PSX shows us what’s gone. Money is behaving differently whether we IR folks like it or not. You can’t fix that by creating a glass room like they do for smokers in European airports and telling the real investors to go in there in order to avoid the rest. That’s a zoo, not a solution.

Here’s a fact. All of us – from regulators, to investors, to public companies – have so far decided that our markets are for trading, not investing. Otherwise, we’d fix it. We wouldn’t just build a room for investors.

Ask yourself after Thanksgiving sometime what next year looks like from the IR chair. Have you adapted to this reality?

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