Tagged: FINRA

Dark Costs

Posted on August 12, 2015

Credit Suisse. Deutsche Bank. ITG. Pipeline. Barclays. UBS. BNP Paribas. Citadel. Goldman Sachs. Liquidnet. Bank of America Merrill Lynch. Citigroup.

What commonality unites these firms? All have been fined for violating rules on so-called dark pools, private stock-trading venues.  At least three are now defunct, Pipeline shutting in 2012, Citi halting its Lavaflow unit last December after paying $5 million to regulators for compromising customer data, and Citadel saying in March this year it would mothball its Apogee platform.

Morgan Stanley and JP Morgan have been investigated but as yet have had no knees capped in the twilight. This is no collection of backwater outfits but a brokerage Who’s Who. These firms are running your buybacks and underwriting your offerings, the pillars upholding equity market-making and liquidity for shareholders.

Ask any Vice President of Marketing at a public company how the firm’s products and services are sold and you’ll get an unhesitant response. But your CFO likely doesn’t know what a dark pool is or why the big brokers running them are continually afoul of rules. You’re the product manager of the equity market if you’re occupying the IR chair. You’ve got a golden opportunity (and in a sense a duty) to be the expert.

Word is ITG, a publicly traded firm itself and among the largest independent operators of markets serving as alternatives to the big exchanges, will pay more than $20 million to settle allegations of trading against customer orders in 2010. It’ll be a test for the company to survive a wallop of this proportion.

Citadel, the hedge fund founded by mogul Ken Griffin, has been fined more than 20 times for breaching various rules. A bad actor?  Visit the Finra newsroom (formerly the National Association of Securities Dealers, Finra is the watchdog for stock brokers) and you’ll see a continuous litany. In the past month alone Goldman Sachs, Raymond James, Wells Fargo, LPL Financial and Aegis Capital were fined tens of millions collectively for demeaning market rules. In May and June, Morgan Stanley paid $3 million.

If everybody is paying regulators, could it be market rules are like the tax code – so byzantine that everybody is routinely in violation? We could countenance a concatenation of penalties for fringe firms jobbing the innocent. But fines are the central tendency. It feels like Las Vegas when Bugsy Siegel ran it.  You’re gonna pay the vig. (We think regulators want to end dark pools. Since they created the rules – Regulation ATS and the Order Handling Rules – that birthed dark pools, they don’t want to reverse themselves. So they may instead penalize alternative venues out of existence.)

Why would public companies accept a market so complicated that Goldman Sachs can’t comply? It gets once more to the IR job today.  At minimum we should understand and measure its performance as we would any other market to ensure that our best interests and those of customers and shareholders are being served. If you want to sell in China, the market is big but what determines whether you can or not is structure.

“Dark pools” is an inaccurate term but if you’re an investor-relations officer you should understand them.  Exchanges like the NYSE cannot give preference and must post prices. They’re public markets.

Dark pools are not public. You need permission from the market’s operator to use one, and most don’t list prices for shares because the reason they exist is to escape a bizarre feature of the stock market: List a price and somebody will attempt to be above or below it in order to keep your price from being matched. Prices are today like the way a friend of ours in California describes using turn signals when driving: A sign of weakness.

So dark pools decide who gets to enter, and the products in dark pools like your shares are listed by amounts, not price. If a pool has 10,000 shares of XYZ, the price will be halfway between the best bid to buy them and offer to sell them in the public market. Ostensibly nobody knows I’m after at least 5,000 shares so I get more at a decent price.

See?  Now think about that. A mall brings people wanting to consume things together with retailers selling them.  In the stock market, complex rules make it challenging to find anyone selling what you want to buy, and the moment you lift a finger, the price changes (this is why your investors increasingly use ETFs and other derivatives – it’s too complicated to get big amounts of the underlying asset).

You say, “I’m a road warrior, a vagabond of highways and jetways, a troubadour of the corporate story. I don’t have time for this stuff!”

Have we got it backwards? Shouldn’t we first understand – and have a say in – the market for our shares before we market our wares?  (I fashioned that rhyme myself.)  Structure counts. Caveat emptor.  Latin but timeless.

Double Standard

Posted on September 24, 2014

Humans are often entertained by illustrations of absurdity through reality.

For instance, Treasury Secretary Jack Lew months ago said he’d like to address tax inversions but lacked authority.  Yesterday, Treasury imposed rules to limit inversions. My reading of Section Two of the U.S. Constitution reveals no lawmaking authority vested in the executive branch.

I could compile a book of examples. I won’t.  Instead, I’ll offer one for the IR chair and the public-company executive suite. In 1975, Congress added Section 13f to the Securities Act to “increase the public availability of information regarding the securities holdings of institutional investors.” I was eight years old then and had no idea I’d spend my adult life working in the capital markets with thus far no update to the provision.

NIRI CEO Jeff Morgan said in his weekly note to members yesterday that the Board had held its annual meeting with the SEC to discuss disclosure. “I am not sure we came to any concrete agreement on how we might traverse down the road to improving disclosure,” Jeff wrote.  He was talking about the burden of it.

In August 2000, the SEC imposed Regulation Fair Disclosure (Reg FD) to “promote the full and fair disclosure of information by publicly traded companies and other issuers.” Following and vastly increasing disclosure-costs was The Sarbanes-Oxley Act of 2002 (SOX as we call it), passed by the U.S. Congress to protect shareholders and the general public from accounting fraud and errors and to improve accuracy in corporate disclosures. I remember that my company spent about $2 million as a small-cap NASDAQ-traded firm with $200 million in revenues complying with Section 404 and other requirements the first year.

I recall an ensuing variety of rules through the Financial Accounting Standards Board and SEC Staff Accounting Bulletins, all adding time, effort, cost and disclosure. (more…)

Street Level

Posted on September 4, 2013

“My CEO doesn’t get market structure.”

I’ve heard that more than a time or two! IROs wanting executives to grasp market complexity in order to see share-behavior in an accurate and contemporary fashion run into the buzz saw of The CNBC Mindset.

I’m not criticizing CNBC or CEOs. But some perspective is in order. In my Denver neighborhood, we’ve had a summer-long municipal effort to improve storm drainage. Streets are barricaded for blocks around and getting to our house is a circuitous adventure. The infrastructure is a mess (we hope this plan works!).

What’s market infrastructure like? On CNBC, everything is headlines and earnings. Fast money. Technicals. Stocks are supposed to be simple things – some multiple of discounted cash-flows minus the cost of capital should render fair value. Right?

That’s how it used to be. Simple, like our streets. Follow your GPS to our house right now, and you’ll be navigating awhile, because the tool won’t show you the truth at street-level.

There are $15 trillion of assets at companies in the US running mutual funds, ETFs, and other funds. About 28% are in equities. There are more than one MILLION global indexes, if you add the 830,000 or so that S&P/Dow Jones calculates at least once daily to MSCI’s 100,000, Russell’s 50,000, and Nasdaq’s 21,000-ish. A million slices of the global economy to which you can benchmark a trade or investment for a second or more.

There are 4,300 brokers regulated by FINRA, and every trade must past through one. Yet just 200 execute trades across 17 billion monthly shares in our models, and 30 drive 90% of volume. Vast uniformity yet continuously shifting arbitrage. Convergence and divergence.

About 40% of the typical US stock’s volume comes from borrowed shares. We see megacaps with 55% of all daily volume borrowed – rented shares, short shares. Your top holders lend securities to large broker-dealers who sublet them through margin accounts for daily use. Renting is cheaper than owning. And ownership won’t hold answers.

Most stocks have intraday volatility around 2% — the spread between high and low prices. That’s a great deal more than the basis points of daily movement you see in closing prices. (more…)

Data Darkness

Posted on July 17, 2013

There’s apparently a reality TV show called “Dating in the Dark.”

It must lack the cachet of Survivor or The Bachelor because you don’t hear much about it. The gist is that a number of people of opposite sexes wander around in utter blackness falling in love. You wonder how that’s superior to the displayed market – so to speak.

But in the equity market, dating in the dark is a big deal. I’m talking about how stock orders find each other. Take Coca-Cola (KO), which reported yesterday. From July 8-12, according to Fidessa’s Fragulator, 25.6% of trades occurred on KO’s listing exchange, the NYSE. But 29.4% were on the FINRA NYSE tape, a reporting facility for trades between brokers rather than on exchanges.

The remaining 44% of KO’s trading mostly met in displayed markets at the Nasdaq, BATS and Direct Edge, and the NYSE’s derivatives-centric platform called NYSE Arca, formerly the ECN Archipelago.

Why does this matter to you, IR professionals? It’s important to understand what’s happening. This is the market you manage – the equity market for your shares.

So, FINRA – the Financial Industry Regulatory Authority – is trying to address concerns that a large amount of stock-dating in the dark is bad for markets. That volume of KO’s on the FINRA NYSE tape? It’s “dark pool” trading, where buyers and sellers meet secretly and anonymously through brokers acting like millionaire matchmakers.

Last week FINRA sent a proposal to its members that would create new reporting rules for dark pools. If adopted, alternative trading systems, or facilities where the principal function is matching trades but the regulatory structure is one for broker-dealers rather than the regime exchanges operate under, would report their trades to FINRA on a delayed basis using a unique market-participant identifier. That way, FINRA would know what trades and volume occurred in each facility to better identify market-manipulation. (more…)

Issuer Data Initiative

Posted on January 16, 2013

“Nobody seems to care about the issuers.”

That short sentence in an email from an investor-relations officer recently reflects what many in our profession feel about share-ownership and trading data for public companies.

Back in March 2011, we decided to do something. You old-timers here at the Market Structure Map, you remember? With hope, fanfare and even media coverage, we launched our quixotic quest for better data. We beseeched the SEC, FINRA and staffers for members of Congress on committees regulating markets.

Turns out we were more like Don Quixote than Sancho Panza. Moving Congress is nearly a fool’s errand. And we also found that unless it produces dollars for regulators, yours is their last priority. But we also made a startling discovery about how to succeed.

Here’s the problem today. Shares trade in fractions of seconds but reports on ownership follow months later. Vanguard founder Jack Bogle says data on share turnover show average holding periods for institutions are now less than five months. Since 13fs are filed 45 days following quarter-end, reporting periods are longer than holding periods!

But ownership data don’t mean what they did before rules the last 15 years transformed market structure. Let me drive that point home. Too much attention is paid to WHO, and not enough to WHY.

Trading “back in the day” was the means to the end. Today, trading IS the end. Nearly 85% of volume is the product of a trading objective, not investment. So complete trading data matter greatly now – and you don’t have them.

ModernIR provides great statistical measures of trading behavior because markets run on rules and math, and we can apply statistics to both. But why do public companies have incomplete data? The act creating the SEC says all constituents shall have equal treatment. (more…)

Bending Like Beck

Posted on August 1, 2012

Do you hate day traders?

Reading the 30-page Waiver and Consent letter from Peter Beck, who once ran now-defunct day-trading firm Swift Trade, it seems FINRA must.

Maybe you do too. But there’s a lesson in the story here, IR folks.

If you missed it, Beck’s woes got page-one billing from the keyboard of Scott Patterson at the Wall Street Journal yesterday. Beck ran a loose global day-trading federation last decade that at peak hosted some 4,000 traders outside the United States funneling orders through Beck’s execution broker Biremis Securities in Toronto.

The allegations are a compendium on failed oversight. We counted 35 instances of the words “appropriate,” “proper,” “improper” and “improperly” in the document signed by Beck and his legal counsel. It effectively bans Beck from US securities markets (although Beck operated outside the US so the ban seems hollow).

Behind bolded subheadings, the letter says primarily that Beck failed to supervise staff, didn’t keep good records and didn’t comply with standards. What gets attention in the Wall Street Journal is a practice called “layering,” in which traders place a bunch of orders at various price points, say, to buy shares in one place, and then simultaneously enter opposing orders elsewhere, and then cancel most orders as soon as other participants react. The aim is a quick profit at minimal risk. (more…)

Be Vigilant

Posted on January 25, 2012

Good to see you folks in Boston last week. But I needed Denver to thaw me out. It was seventy here last Saturday. I washed the car in T-shirt and flip flops.

If at first you don’t succeed, try, try again. So it goes at the Nasdaq.

Last autumn the exchange proposed to charge small-cap companies fees of up to $100,000 to incentivize market-makers to trade small-cap ETFs, arguing to the SEC that it would infuse thinly traded securities with liquidity. The rule would have required the SEC, FINRA and the exchange itself to reverse longstanding prohibitions on paying market makers to trade securities. For certain exceptions only (of course, exchanges pay billions of dollars in rebates to “liquidity providers” each year).

The SEC promptly rejected the rule-filing. Now it’s back. See it here.

IR folks, do you know the adage about being wise as serpents but meek as doves? Question what you hear from exchanges that rely on data and transactions – not issuers – for revenue and profits. Take nothing at face value. Examine the facts. (more…)

Time for Public Companies to Demand Better Data

Posted on March 8, 2011

Don’t pass Go.  I will give $200 to the first person who correctly answers two questions.

Only corporate IROs may answer. Apologies to the rest, but you’ll see why. Corporate IR pros, look up and write down your trading volume on March 4. First question: Where did your shares trade?

Second question: Which brokers executed the trades that, when added up, equaled that volume you wrote down for March 4?

Yesterday, Dow Jones reporter Jacob Bunge wrote about our drive to organize companies to petition Congress and regulators for more transparent data about their share-trading.

There’s a landing page on our website for the letter we’ve drafted. Our goal is to list 100 companies as supporters when we deliver this letter. It should be 5,500. I’ll tell you why in a moment. (more…)

Why We Have Eleven Exchanges and Counting

Posted on November 16, 2010

Blaise Pascal, the 17th century French brainiac, is reputed once to have said in a post script: “I’d have written a shorter letter, but I didn’t have time.”

We wonder what Pascal would think of the 523-page Final Rule for Regulation National Market System (Reg NMS), published August 29, 2005. Step forward a half-decade, and it explains why deep and liquid markets that were thought to foster the interests of long-term investors have instead fed a fragmented maker/taker market system florid with high-frequency traders moving the same shares from place to place. (more…)