Tagged: Short Selling

Cliffside

I took a screenshot yesterday at 2:22pm, on Feb 22, 2022. 

Sign from God? Turning point? Hogwash?

Those are better than most proffered reasons for the stock market’s moves.

Lately it’s been delivering pain. Blame goes to Ukraine, where the Gross Domestic Product of about $155 billion is 40% of Apple’s 2021 revenue. Way under Denver’s $200 billion GDP. A tenth of Russia’s.

Illustration 45324873 © Iqoncept | Dreamstime.com

Ukraine is not destabilizing global stocks. Numbers help us understand things.  The numbers don’t add up, without offense, for Ukraine.

So, why are stocks falling? Answering why is like explaining what causes earthquakes: We understand they’re products of mathematical facts insinuated into our dirt.

Well, mathematical facts shape equity markets too, and the construction emanates from the USA and its 40% share of the total global equity market.

Anybody remember the Flash CrashFlash orders?  Books were written. Investigations convened.  Congressional hearings held.  MSM’s good friend Joe Saluzzi was on CBS 60 Minutes describing how the stock market works.

We seem to have forgotten. 

Now the Department of Justice is probing short-selling.  The SEC is investigating block trades.

For God’s sake.

The block market that should be investigated is the off-market one where Exchange Traded Funds are created in huge, swapped block trades of stock without competition, taxes, or commissions. The SEC is fine with that. Approved it.

The short-selling needing investigating is the market-maker exemption from short-locate rules that powers the stock market.  Academic studies claiming clouds of short-selling around big declines lack comprehension of how the stock market works.

The SEC knows how it works. I doubt the DOJ does. 

Everybody wants to find that volatility springs from nefarious intent. Greedy people. Cheats.

No, it’s the rules. The SEC publishes data on cancelled trades – legal spoofing.  That’s the MIDAS system, built for the SEC by a high-frequency trader.

People have gone to jail for what’s a fundamental fact of market function. The truth is, most orders are cancelled.  How can you parse what’s legal or not when the market is stuffed with behaviors that if separated by label or exemption move from illegal to legal?

Something should be wrong, or not.  Don’t lie. Don’t steal. Don’t cheat.  The Ten Commandments are simple.

When you say, “Don’t cheat – unless you’re a market-maker,” your stock market is already a disaster in the making.  People won’t understand why prices go up or down.

Here’s some math.  The average trade-size in the stock market – shares trading hands at a time – is down more than 50% since 2016.  It dropped 10% just in the past 200 days in the S&P 500.

The average S&P 500 stock trades 100 shares at a time, data ModernIR tracks show. That’s exactly the regulatory minimum for quoting a bid or offer.

Meanwhile, the number of trades daily is up more than 20% from a 200-day average of 40,000 trades daily per S&P 500 component to nearly 50,000 in the last five trading days.

Oh, and roughly 48% of all stock volume the last five days was SHORT (vs about 45% 200-day average).

And the DOJ is investigating short-selling.

Combine stocks and ETFs and 90% of trades are cancelled. Over 90% of all short-selling is sanctioned, exempted market-making – firms making stock up out of thin air to keep all those 100-share trades happening.

The DOJ is searching for a private-sector speck while a beam protrudes from the all-seeing government eye.

Do we want a stock market that gives you 100 shares that might not exist? Or a stock market that reflects reality?  People don’t even know.  You can’t have both.  The SEC simply hasn’t explained to anybody this Hobson’s Choice.

The principal stock buyers and sellers embed their computers in every tradable market on the planet, and all the machines share instant information. They’re 50% of volume. That’s why equities rise and fall in relative global uniformity (not perfectly – there are always asymmetries to exploit).

Machines identify breakdowns in supply and demand and magnify them. Stock exchange IEX made famous by Michael Lewis’s book Flash Boys calls it “crumbling quotes.”  The stock market becomes like California cliffsides.  It…dissolves.

Investigations are wasted time.  Constant scrutiny of headlines and fundamentals for meaning behind the market’s moves is mostly pointless.

I’m not saying nothing matters. But the central tendency, the principal answer, is market structure.

I could also say math signals gains next, and also says stocks are down because momentum died in Jun/Jul 2021. Another story.

There’s just one thing wrong with the stock market.  Its singular purpose is the perpetuation of continuous activity.  When activity hiccups, the market crumbles like a California cliffside.

The rest is confusing busy with productive.

And that’s why if you’re a trader or public company in the stock market, and you don’t spend SOME time understanding how it works, you’re on that cliffside.

Street Level

“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…)

Stopping Shorts

We’re in Paris.

After last week’s pelting Hollywood, FL schedule at NIRI National 2013, we’re sight-seeing along the Seine and then wheels-down southward through Provence on bikes. Tell you about it in two weeks.

Back to NIRI. The Westin Diplomat taunts with beckoning views of surf and sand mere yards away while you ride chilly escalators through its immense conference center. One early walk Wednesday up the strand, home to bargain venues like the Manta Ray Hotel and dining establishments where breakfast still goes for $3.90, cured our longing for the outdoors, however. We soaked fast in the sultry air where but degrees of atomization separate sea and sky. We don’t know humid in Denver.

Observations? NIRI ran a solid show, tightening panel-times and offering innovative material to spice up the same stuff you’ve always seen if you’ve gone to fifteen of these like I have. Audience? Seemed light to me, perhaps some under the 1,200-ish we heard. But it’s FL. Maybe a chunk hit boats and links rather than booths and panels.

ModernIR pumped up its presence with a new booth, a bag insert, and a full page in the conference program. And I was on a panel about short-selling (we track short volume with algorithms). In all my NIRI years, I can’t recall one on shorting that featured the head of securities-lending for Franklin Templeton and a real short-selling hedge fund.

The gregarious Kevin Tuttle, CEO of short fund Tesseract Management, entertained us with wide-ranging views interspersed with gems that could slip by if you weren’t paying close attention. (more…)

Equity Supply Chain

Dollar General (NYSE:DG) dropped 9% yesterday, offering a lesson to investor-relations professionals.

Before that, a plug: At NIRI National next week I’m paneling with the CEO of short-seller Tesseract Management and the head of securities-lending for Franklin Templeton on short-selling strategy and practices. Longtime NIRI fixture Theresa Molloy has organized a great discussion and will moderate. And please visit ModernIR at booth 719, our eighth straight year in the exhibit hall.

For Dollar General, revenues were light and guidance lighter, margins weakened due to the products folks were buying last quarter, and inventories rose 21%. Investors and traders can examine facts about the structure of Dollar General’s market, from margins to supply-chain, and make value judgments (which will be distorted by other market behaviors, however).

Have you considered that your equity market is also affected by logistics, supply-chain and who’s consuming the product? We perhaps never imagine that the stock market has the same characteristics and limitations of other markets. Have you gone to the shoe store and they didn’t have your size in the brand you wanted? How come that doesn’t happen in the stock market? (more…)

A Short Story

Happy New Year! Boy, where to begin. With the Fiscal Cliff arrayed theatrically as the curtain rises on 2013, it’s a crapshoot picking what to write in the program notes.

So we’ll take aggressive short sellers. No, we don’t mean market Sentiment favors shorts. As December concluded, Sentiment Indicators for 15 client stocks comprising a market sample included two Negatives, three Positives and ten Neutrals. If it were a political poll, the data show your candidate ahead slightly.

Plus, the dollar is about where it started 2012. The Dow 30 were up 7%. Last year’s Gross Domestic Product (the sum of personal consumption, private investment, net exports and government consumption) likely rose about 2%, while the money supply was up 6%, meaning consumption will cost more, which means 2013 GDP, 92% dependent on personal and government consumption, has a good shot at rising.

So things look good if you don’t scrutinize economic structure (if money in circulation is rising faster than output, growth is a bit of a pyramid scheme).

Which brings us to our short story. Did you hear about Herbalife? Activist William Ackman of Pershing Square, not typically a guy who shorts stocks (borrows and sells them in hopes price declines so shares may be returned at a lower cost, producing a gain), targeted the NYSE-listed network-marketing purveyor of supplements with a public attack precisely as monthly options expirations and quarterly index rebalances were occurring December 19-21.

Ackman called the firm’s sales-recognition practices a pyramid scheme. We can’t assess the merits of his argument. But we want to begin 2013 with a lesson on structure – of the market.

Look around at noteworthy “short attacks,” we’ll call them. Often they happen during monthly options-expirations. Maybe it’s planned, maybe not, but the effect is simple to understand. Big money doesn’t invest today so much as it manages assets and risk. (more…)

“We determined that it was appropriate to re-examine the appropriateness of short sale price test restrictions.”

We copied that sentence from the SEC’s 334-page charter instituting Rule 201 amendments for short sales. While it’s amusing that the authors modified the word appropriate with the word appropriateness, what’s important is that the rule took effect yesterday, Feb 28. What is it and how might it impact investor relations?

It’s hard to summarize a document consuming 60% of a ream of paper in one sentence. But Rule 201 implements an uptick rule – which regulators removed as part of Reg NMS in 2007 – when securities drop 10% from the preceding day’s closing price. If that happens, an uptick rule will be enforced in which long sellers matching at the best bid or offer will be able to sell ahead of short-sellers, and shorts will only be able to sell if the price ticks up above the last bid.

The idea is that if long sellers get called up to the front of the line, it’ll promote investor confidence by reducing the severity of short-driven price swings. And it’ll improve market-efficiency by letting those with long positions off the boat, thus discouraging short sellers from trying to sink the boat. (more…)