Tagged: stock market


When you’re amid the tulips you don’t know it. 

Much has been written about the Great 17th Century Dutch Tulip Bulb Mania.  I’m not going to dredge the channel anew.

Photo 6042009 / Tulips © Pindiyath100 | Dreamstime.com

But taking a skiff back to skim over the surface is worth doing, to remind us humans that what we think we know at a given time is incomplete at best and perhaps way off.

In the 1630s, tulip bulbs became the biggest financial market in history in Holland.  People thought the sky was the limit for the value of tulip bulbs.

Like the Winklevoss twins saying bitcoin was headed to $400,000. Scott Minerd of Guggenheim Partners, a man of gravitas and reputation, concurred.  FTX was worth $32 billion.

We didn’t know we were amid tulips again. 

I’m sure that people in The Netherlands thought that if somebody was willing to pay as much for tulips bulbs as they paid for a house that somebody else would pay the value of two houses.

The trouble always is that forecasting higher prices for things supposes someone can and will pay a higher price. 

And what causes higher prices?

The same thing always.  Money. Seventeenth-century Holland was awash in gold from the new world. Inflation.

What about supply-chain issues, wars, basic enthusiasm? None of these can gain – pardon me – purchase unless there’s money available to spend.

Oil is back below where it was when Russia invaded Ukraine so all the talk about that war causing energy inflation is bogus. It was just tulips. Look, Ukraine’s economy is the same size as Denver’s. To suppose the use of fuel in Denver will price the global commodity market is just. Dumb.

Here’s a timeline using oil to illustrate the arc of tulips.  On Mar 15, 2020, the US dollar as measured by the “dixie,” the DXY index, shot up to nearly 103. Call 108 parity with the euro. In Feb 2018 the DXY was near 89.

By Jan 2021, the dollar was back to 90 as floods of greenbacks sapped its value.  Had not the whole rest of the planet also been hosing their economies in currencies, it might have been 70.

Meme stocks soared, oil soared, prices everywhere soared.

Then that stopped.

Between June 2021 and Sep 2022, the DXY rose from about 91 to 114. 

That’s why oil fell and inflation has eased some.  And why the stock market hit post-Pandemic lows. Everything becomes a tulip when it rains currency.  Everything returns to earth when the rain stops.

But it’s not synchronized. One thing happens, the other follows.

The DXY dipped near 104 last week.  Oil prices move inversely with dollars, as do stocks. So oil is headed back up. It’s messy but you can always find the currency inverse correlatives.

We just know exactly when or where. If the Federal Reserve sells assets off its balance sheet, trading them for dollars and removing dollars from circulation, the DXY will rise again.

And tulip prices will fall anew.

It behooves us to understand the characteristics of fields of tulips and the probability of wandering into and out of them.

Which leads us back to the stock market.  I’m in Wilmington DE for a Board meeting where the Investor Relations Officer and the CFO have called together experts like ModernIR to help the Board understand how the market works.

It’s laudable. Every public company should do that – not so ModernIR can parade but so Board directors understand what’s controllable and what’s not.

The stock market is unique in history in its capacity to be insular for extended periods to the presence or absence of money.

If a machine wants to buy something now and sell it in less time than the blink of an eye for a tenth of a penny more, the presence or absence of money manifests differently than in tulip bulbs or cryptocurrencies.

Someone might well pay a tenth of a penny more. You don’t know you’re overpaying when the unit of measure is a tenth of a cent.

Compounded over time and through acceleration by machines manifesting vast seas of tenth-penny buys and sells, the market creates an illusion of efficiency and correctness.

It leads public companies to believe that over the long term, stocks reflect cash-flows.

No, over the long term, your stock reflects imbalances in Supply and Demand translated to the presence of money and the degree of comfort traders feel spending it on things.

I’d rather that wasn’t true!  I’d like to tell you your stock’s value is a prudent read on the difference between your revenue and your expenses.

But it’s really a tulip bulb, in today’s stock market.  It’s a thing that’s assigned a value based on the willingness of people with varying horizons from a few microseconds to years, to trade dollars for it.

And the purpose of the stock market is setting prices of everything in 100-share increments. It’s no longer a market matching equity investors with equity investments.

So, what are you paying for, issuers?  Do you know that just 20% of trading in your stock, or less, occurs at your listing venue?

Tiptoeing through tulips sounds fun.  It is till it isn’t.  To see the tulip effect in the stock market, know how it works. This is the field of gold for investor-relations. And investors.

If you want to know more, the ModernIR team has a client educational session Dec 14 at 130p ET. Send me a note and I’ll share the invitation.

Decline and Fall

We’re just back from Rome, where the empire is no more but its imprint enthralls. 

And yes, that’s like the stock market.  We’ll get to it.

Do the Scavi tour under St Peter’s Basilica.  It’s breathtaking and not just because it’s underground.  It’s an archaeological marvel establishing that Christian traditions about the burial of the Apostle Peter have merit.

As with the stock market, there are no absolutes, just high probabilities. But it’s powerful to see the origin, replete with excavated walls and crypts and stairs and mosaics and plaques, of the largest church in the world.

At the Colosseum in Rome (photo courtesy Tim and Karen Quast) Oct 2022.

And at the colosseum (see us at right) there was merchandise, and seating sections, and concessions, and sophistication rivaling anything we’ve got today in the NFL.  Moving Nero’s statue, which the builders did after draining Nero’s private lake, would challenge our modern machinery. They did it with 24 elephants.

In the Pantheon you walk the same multi-colored marble floor that Marcus Agrippa did, a convex design with subtle drains that wick away rain falling through the open oculus. How many floors exist after 2,000 years open to the air? This one’s perfect still.

Rome was built to last but didn’t. 

The stock market that used to be on the corner of Broad and Wall streets in New York is now on servers in Mahwah, NJ, connected to the Nasdaq’s servers in Carteret, and CBOE and IEX and other servers in Secaucus.

That alone should be telling. The market isn’t in the city that talks about it.

The broadcasting about the stock market – endless chatter about Sellside upgrades and downgrades and whether a stock trading at ten times earnings is a good buy – continues apace from downtown New York.

But the stock market is on fiberoptic cable in New Jersey.

Speaking of disconnects, analysts decided this week that expectations for Ford and GM should be cut.  After the stocks are down 46%.  How is that helpful?

And it’s the essence of the disconnect. The market’s anachronistic trappings are way behind the times. The empire of the Buyside and Sellside long ago became hunks of broken marble strewn amid a remnant of pillars along The Forum.

So to speak.

Patterns show Active and Passive money left Ford and GM back in February.  What continued were the machines, and derivatives. And nine months later, the Sellside cuts ratings and price targets.


One cannot help but think of the Federal Reserve.  We’ve had two quarters of declining GDP but there’s no recession.  Way behind. Living in the past.

Rome dissolved into its excesses.  So did the Buyside and Sellside, leaving the looting to the Goths, Visigoths and Vandals.  The Fast Traders (no offense, computerized market machinery).

Declines and falls are products of losing touch with reality. 

The stock market isn’t motivated by the Buyside and Sellside. It’s motivated by spreads and models.  And the machines making the money are happy that we all just continue watching the hand.

The trappings, the marketing materials, the talking heads, the lavish show, haven’t kept up.  Like Rome.

I relished modern-day Rome.  It’s full of delightful people who will patiently help you say things like dopo di te (after you, per favore), and a presto (see you soon!).  The pastas are addictive (cacio a pepe, amatriciana, and up north in Tuscany, pici). The cobbled streets are a storybook. The Lazio wine from Habemus is delectable.

Leaving, I felt an ache.  It’s just so…fabulous. 

And there’s your upshot, investors and public companies. The stock market today is a riveting confabulation of marvelous machinery. It’s just not what it was.

Like yesterday. Future were down steeply before the open.  I told users of our decision-support platform EDGE that you can’t believe the futures. They’re not market reality.

The DJIA at one point was up nearly 400 points.  It finished flat because most of the market didn’t keep pace, and the computerized machinery in New Jersey that really is the stock market knew the money pegging average prices would have to be a lot lower.

And so the market gave up its gains. It was a whole Roman Empire in a day, rising, flourishing, declining, falling.

So, what are we supposed to do?  First, enjoy the stories and traditions but don’t confuse them with reality. We need to be alert and informed members of the equity-market community, not a bunch of tourists.

We can’t succeed as investors, traders and public companies without a solid grounding in reality. Know how the darned thing works.

Now if you’ll excuse me, I need to go eat some salad.  For a change.

Market Palio

Maybe we should have a horse race to decide our elections. 

In Siena, the whole region gathers July 2 and August 16 annually, thronging the Piazza del Campo (the city square you see behind our beverages in the photo here, shot Sep 26) for The Palio, pounding equine competitions involving the city’s contrade, the 17 districts of Siena.

View of the Piazza del Campo from the best bar seat in the square (photo Tim Quast Sep 26, 2022).

After Siena succumbed in a 150-year war with Florence (talk about endurance), competition turned inward. The city’s uniquely designated districts redirected their energies to competitive horsemanship instead of Florentine raids.

Each year, horsemen from ten of the contrade race each other, three furious laps around the square. The other seven automatically qualify for the next race, with three others added by lottery.

I’ll skip the finer details but it’s full of intrigue, chicanery, sordid deals, massive sums spent on jockeys, who may conspire and cheat, and tears and cheers and meals and wine.

In short, it’s just like politics. 

But in The Palio, while victory is everything, it really means nothing. It’s just Sienese culture.  That seems like a much better outcome than modern politics.

The stock market lately too has felt like The Palio.  A drumming, entertaining, heartbreaking, chaotic mess pelting around turns and slamming into walls, with little logic or purpose.

Can we make sense of it?  Of course. But not logically.  It’s the Palio of Siena.  It only makes sense if you understand the underlying story and purpose.

Public companies and investors, your best friend amid the churning dirt of the market’s Palio is market structure. It’ll help you make sense of what seems to be random disorder.

The best-performing S&P 500 stock year-to-date is OXY, up about 88%.  Ranked second is ENPH, up about 55%.  Both are energy stocks, one the old-fashioned kind with a D rating for planet-friendliness, whatever that means.  The other is a clean-energy stock.

Active money is 9% of OXY’s daily volume, 10% of ENPH’s. Both perform well financially but not more so than other Energy stocks. But both are darlings of Passive money, receiving outsized allocations. Over 40% of trading volume in both traces to Exchange Traded Funds.

It’s like the two stocks were the winning horses in The Palio (where the horse wins, even without a rider).

It’s a lesson about the stock market. There’s still a lot of clinging to the notion that you own “good companies.”  As defined by what?  OXY and ENPH are good companies as defined by the amount of volume from ETFs.

If that’s the money driving the stock market, then they’re both good companies.

And it illustrates the importance of understanding what kind of money creates good companies.  And it may not be revenue and profits.  It may be Demand vs Supply.

OXY has spent 130 of 183 days since Jan 4 at 5.0 or higher Demand on the ten-point scale we use to measure buying and selling by investors and traders, called Market Structure Sentiment.  ENPH has spent 118 days at or over 5.0. 

The more time stocks spend over 5.0, the better they do. There’s no direct connection to financial results.  It’s about whether there’s greater Demand for the stock from any purpose or time-horizon.

Did anyone pick OXY and ENPH as the 1-2 ranked S&P 500 stocks for 2022 when the year began?  I don’t know.  Not based on financial performance. Those winners would have come from the Tech sector. Which has been brutalized.

The math is clear.  Winners in the stock market are not determined by financial performance but by Supply/Demand balances. Strong demand, constrained Supply, prices rise.  It’s a much better predictor of winners than is the bottom line.

For better or worse.

In that sense, the stock market is The Palio. It’ a horse race built around culture, where “culture” is market structure.

We tell users of Market Structure EDGE to always know the Supply/Demand balance of stocks they like, and to buy divergences.

And for public companies, the Supply/Demand balance is critical to predicting what stocks will do at any time, but especially into earnings.  After all, Supply and Demand are measuring every input – fundamental, quantitative, long/short, global macro, hedged, high-frequency, leveraged, you name it.

So how do you win the stock market’s Palio?  It’s a lottery.  You can improve your chances of a shot at victory by first being BIG.  Get into the Russell 1000 and do it with M&A if you must. You’ll be where 95% of the money and the market cap is.

And then it depends on your contrada, your segment of the stock market.  Then you hang on till the three laps are done. The good news is we can measure your odds of winning.

Short Story

Are traders shorting your stock?

There’s a good article in IR Magazine by independent board director Rosalind Kainyah on what she expects from the company’s IR team.  One data point: Comparative shorting for the company and peers.

The trouble is most Boards and c-suites think only about Short Interest. It’s a 1974 measure created by the Federal Reserve to track the use of margin accounts.  It’s not an SEC metric, let alone one suited to a market that’s 100% electronic, 97% algorithmic.

After the USA left the gold standard in 1971, financial-asset volatility exploded. The Fed feared it wasn’t accurately tracking the money supply. So it created Regulation T requiring a 50% margin in eligible accounts.

Short Interest reports twice per month were born. The measure hasn’t changed in 48 years.

Short Volume is a 2010 measure reflecting the SEC’s passage of a modified uptick rule called Regulation SHO Rule 201.  It defines certain restrictions on shorting stocks and it’s part of Regulation National Market System governing the stock market now.

What’s more, Short Interest is a consequence of Short Volume (there must first be shorted shares before there can be Short Interest). Why meter the consequence if you can measure the cause?

So that’s what we assess – in everything – at ModernIR, applying proprietary smoothing techniques reflecting market rules.  We’ve been tracking that data since Finra implemented regulations for brokers about reporting it.

We call Short Volume “Supply,” because it’s the stock market’s supply chain. That is, most large orders to buy or sell are in part or in whole facilitated by borrowed stock.

(EDITORIAL NOTE: The SEC wants a “continuous auction market” and so exempts market-makers from having to locate shares to short. If you want to know more, Google “SEC market-maker short exemption” and click “Key Points About Regulation SHO – SEC.gov”.)

Source: Market Structure EDGE Broad Sentiment data, Sep 20, 2022

When Demand is rising and Supply is falling, stocks rise. That condition manifested briefly when the market hit 2022 highs to end March, and again from June option-expirations to August options-expirations (SEE FIRST IMAGE).

The reverse punctuated the 2022 low for stocks into June options-expirations. That was a record high for Supply.

Until now. 

Currently, 52% of S&P 500 volume is short, borrowed. That means a minority, 48%, is stocks the buyers and sellers own.

Take a good look at the image.  Demand is decent, over 5.0 (baseline for rising prices). But the supply chain is overloaded.

Your Board and c-suite would no doubt like to know the Supply/Demand balance in your stock, your peers, your sector, industry. 

Speaking of adding value, the client-services team at ModernIR hosted a panel on using market-structure data in IR. Thank you, Clay Bilby, IR head at Palo Alto Networks (PANW), and Matt Garvie, VP IR at US Xpress (USX), for sharing your approaches.

While that panel was unfolding, I was in New York to present at the IR Workshop for the American Gas Association, and I focused on using data to engage the c-suite and Board. You can see a condensed version of my slides here.

Data is king. 

Back to the Short story, VIX options expire today with the whole market shorted, and Jay Powell hiking rates 75 basis points or more.

The market might rise, even so.

I’m not saying it’ll happen! But there will be effort by the parties who are NOT short to move the market in a way that mitigates risk.  It won’t surprise me.

The central tendency though is that a market with topping Demand well shy of historical tops that’s simultaneously the shortest on record will fall. 

We could take a drubbing.

It will be essential to watch the supply chain, Short Volume.

Unless and until those levels recede in a sustained and meaningful way, the bias of the market will be down.

And it doesn’t matter what the news is. Market Structure tells you what everyone thinks – longs, shorts, global macro, asset allocators, stock pickers, risk managers, all of it.

Everything occurring in the stock market rolls up into Demand, and Supply.

That same data in your stock will tell you ahead of results what’s likely to happen, no matter if you beat or miss.  It will tell you if investors buy your stock on non-deal roadshows. It’ll tell you who to call this week among your holders.

If the stock market rallies today, tomorrow, Friday, know it’s quicksand unless Short Volume comes down. Without a supply-chain change, the market will be lower a week from now than it is today.

Maybe a lot lower. That’s the short story.

Photo courtesy Tim Quast, Sep 19, 2022.

PS – And this second image is the view up 8th Avenue from W 43rd in New York City Monday Sep 19 from the 38th floor of the Westin. That tallest building is the latest Billionaires Row addition on West 57th. The penthouse is yours for $250 million.

For the Birds

Did you know the Caribbean is full of brown boobies? 

The blue-footed brown booby, about the size of a seagull.  We’re just back from sailing St Martin and St Barts, where the critters of both sea and sky delighted.

Unlike the stock market, apparently, which has gone to, um, the birds. 

By the way, best food in the islands?  Grand Case on St Martin. It’s French. Need I say more?  On our boat, we had French food, French wine, French chef.

It’s a wonder we left. I gained five pounds. You can see it in the photo, aboard our catamaran in St Barts (more trip photos if you’re interested).

Tim and Karen Quast aboard Norsegod in St Barts Harbor (courtesy Tim Quast).

Back to stocks, we should have expected cratering markets because fundamentals have deteriorated dramatically.

Oh no, wait. They haven’t. 

Zscaler (ZS), which has been crushing expectations every quarter, is up just 6.7% the past year now after rising over 500% the past five years. It’s down 33% the last six months.

Philip Morris (PM), which is not growing, is down 7% the past five years but up 8% the past six months.

The popular explanations for why these conditions exist have reached such shrieking insanity that I might be forced to return to the sea.  And French food.

First, let’s understand how stocks go up.  Not the “more buyers than sellers” version but the mechanics. 

There is demand.  It can come from investors, traders or counterparties. Active investors buy opportunity, Passive investors buy products – growth, value, etc. Traders chase arbitrage (different prices for the same thing). Counterparties buy or sell to meet or mitigate demand for derivatives like options.

When all converge, prices explode. 

And there are compounding factors. Many investors now prefer Exchange Traded Funds (ETFs), which don’t increase the SUPPLY of stocks, just the DEMAND for them.

And traders buy or sell short-term prices with connection only to previous prices, leading to spiraling short-term gyrations.

And derivatives as both implied demand and supply magnify moves.

Are you with me still? Think this is for the birds?

The Tetris of the stock market, the arranging of these blocks, distorts perceptions of supply and demand and fosters absurd explanations.

And over time, it erodes realized returns.  All the toll-collectors – money managers, ETF sponsors, trading intermediaries, stock exchanges, counterparties – get rich.

As of yesterday, the Nasdaq is up about 6.5% annually since March 2000, before taxes and inflation and without respect to risk premia. Tech stocks move 3.5% intraday daily.

You see? Daily price-moves are more than half the average expected pre-tax returns. That’s because of what happens when all the Tetris blocks start falling.

Here’s how. Active investors stop buying equities. Passive investors slow allocations and see redemptions.  Speculators stop setting prices. ETFs have to redeem shares so compounding demand is suddenly replaced by a vacuum. Implied demand via derivatives vanishes.

And prices implode.

This is how the DJIA drops 800 points in a day.

And we haven’t even talked about short volume.  The SEC permits intermediaries to create stock when no real supply exists to satisfy it. That is, they can short stocks without borrowing.

That works great on the way up as it provides supply to rising prices that would otherwise go unsatisfied. On the way down, we become aware that the implied demand in created stock just doesn’t exist.

So, Tim. What can we do in this market?  

You can’t control it.  We could fix it if we stopped letting shilling Fast Traders set prices and create stock.

If we junked the continuous auction market and returned to periodic auctions of real demand and supply. No real buyers or sellers, no prices.

And stock markets should actually compete by offering separate “stores” that aren’t connected electronically and forced to share prices. As it is, markets are just a system.

Alas, none of this will happen anytime soon.


We can continue as companies, investors and traders fooling ourselves that fundamentals drive markets.  Or we can learn how markets work. The starting point.

Otherwise, we’re like somebody reading the opening line today. “Did he just say ‘boobies’?”

I was talking about birds.

We need to understand the topic. The market (ask us, we’ll help).

Extended Chaos

See this photo?  Winter Carnival in Steamboat Springs. The Old West. Sort of. People ride shovels on snow down main street behind horses.

Courtesy Karen Quast. 2022 Steamboat Winter Carnival.

Now. What the hell is happening in extended-hours trading? Could be a shovel ride.

You might’ve forgotten with the pace of news and markets, but during Q4 2021 earnings, SNAP lost 24% of its value by market-close, then soared 62% in the hour and a half after.

Facebook – Meta Platforms (strange to brand as something nonexistent) – lost $235 billion of market cap after the market closed.

Amazon was down 8% at the close, then rose 18% afterward.  Market cap, $1.5T.

What’s going on?

Let me tell you a story. Settle in.

Once there was a buttonwood tree in New York City and stockbrokers would gather to trade there. In 1792 the brokers formed the NYSE.  To trade securities listed at the NYSE, you had to be a member.

Time passed. It worked. In 1929, the stock market blew up.

The government flexed. The Constitution authorizes no intervention in securities markets, but people were economically panicked.  Congress passed the Securities Acts of 1933 and 1934, taking control. Stuff got complicated.

In 1975, with inflation soaring and a war in Asia ending badly (déjà vu), Congress decided the stock market was a vital national interest and should be a System.

They passed the National Market System amendments to the Securities Acts after finding that new data technology could mean more efficient and effective market operations.

So Congress, pursuing the nebulous “public interest,” decided it must decree fair competition among brokers, exchanges, and other markets.

And they said opportunity should exist for trades to execute without the middleman, the broker-dealer or exchange – rejecting the buttonwood model.

With me still? 

I’m explaining how we ended up with extended-hours trading, and why it bucks like a bronc. We’re not there yet. 

In 1971, the National Association of Securities Dealers launched an automated quotation system. That became the Nasdaq.

In the 1990s, computerized trading systems outside the stock markets – as Congress envisaged – sprang up. No broker-dealers. No middlemen (save the software).

They demolished stock markets, taking more than half of all trading.

They were firms like Island, Brut, Archipelago, Instinet (the oldest, from 1969). They weren’t stock exchanges, weren’t brokers.  They were software companies matching buyers and sellers.

Ingenious, frankly. The exchanges cried foul.

The SEC intervened with a set of rules forcing these so-called Electronic Communications Networks (ECNs) to become broker-dealers.

And extended-hours trading began.


Because exchanges had to display ECN prices, and ECNs had to become brokers. So exchanges would win the price business, and ECNs would win the size business.

By the way, the exchanges bought the ECNs and incorporated the technology. The Nasdaq runs on vestiges of Brut and Island, the NYSE on Arca – Archipelago.  Instinet is owned by Nomura.

In 2005, the SEC fulfilled the vision of Congress from 1975, imposing Regulation National Market System – Reg NMS. That’s the rule running the stock market today, with its 17 exchanges and about 34 “dark pools,” which are ATS’s.  Latter-day ECNs.

Reg NMS links all markets, removes the differences in listing one place versus another, shares all prices and all data, and mandates trading at the best systemwide price.

But rules preceding Reg NMS for ATS’s didn’t proscribe extended-hours trading.

The irony? Congress wanted to cut out the middleman, the broker and exchange, and instead ALL trading is intermediated. It might be the craziest thing in human history outside emergency powers.

Plus, the rise of Passive Investment means vast sums need reference prices – a set price each day – to comply with the Investment Company Act of 1940 (another rule).  So exchanges persist with a 4p ET close.

But Exchange Traded Funds (ETFs) match off-market in blocks – and the parties running those trades are the same operating dark pools (ATS’s), behind most derivatives.

And there you have it.  Exchanges create prices for “40 Act” funds at 4p ET. And broker-dealers trade stuff other times, getting ever bigger.  Gyrating prices when the Stock Market is closed.

It’s now at times the tail wagging the dog.  It’s incongruous if the aim of the legislation behind Reg NMS is a free, fair, regulated, orderly, connected market.

That’s your answer.

Stocks gallop after the market closes because rules have fostered an arbitrage trade between market hours, and after-hours. The reason for extended-hours chaos is rules bifurcating the stock market into prices for thee but not for me.

The fix? I think it’s wrong for a “market system” to own the price of anything.  Stores for stocks should be no different than grocery stores – stocking what they wish and offering prices and supply.

How do we change it? Fix government powers. The SEC owns the market. Not us.

Starting Point

The starting point for good decisions is understanding what’s going on. 

I find it hard to believe you can know what’s going on when you’re authorizing trillions of dollars of spending.  But I digress.

Illustration 22981930 / Stock Trading © John Takai | Dreamstime.com

Investor relations professionals, when was the last time you called somebody – at an exchange or a broker – to try to find out what’s going on with your stock? I can’t recall when the Nasdaq launched the Market Intelligence Desk but it was roughly 2001.

Twenty years ago.  I was a heavy user until I learned I could dump trade-execution data from my exchange into my own Excel models and see which firms were driving ALL of my volume, and correlate it to what my holders told me.

That was the seed for ModernIR. 

Today, market behaviors and rules are much different than they were in 2001. Active money back then was still the dominant force but computerized speculation was exploding.  What started in the 1990s as the SOES Bandits (pronounced “sews”) – Small Order Execution System (SOES) – was rapidly metastasizing into a market phenomenon.

Regulation National Market System took that phenomenon and stamped it on stocks. What was a sideshow to ensure retail money got good deals now IS the stock market.

Nearly all orders are small.  Block trades are about a tenth of a percent of total trades.  For those struggling with the math, that means about 99.9% (not volume, trades) aren’t blocks.  The trade-size in the stocks comprising the S&P 500 averaged 108 shares the past week.  All-time record low.

Realize, the regulatory minimum for quoting and displaying prices is 100 shares.  Trades below that size occur at prices you don’t even see.  I have a unique perspective on market machinery.  I’ve spent 26 years in the IR profession, a big chunk of that providing data on market behaviors to public companies so they know what’s going on (the starting point for good management).

Now I run a decision-support platform too for active traders that gives them the capacity to understand changing supply/demand trends in stocks – the key to capturing gains and avoiding losses when trading (we say take gains, not chances).  And I trade stocks too.  I know what it means when my NVDA trade for 50 shares executes at the Nasdaq RLP for $201.521.

Yes, a tenth of a penny.  It means my broker, Interactive Brokers, routed my trade to a Retail Liquidity Program at the exchange, where a Fast Trader like Citadel Securities bought it for a tenth of a penny better than the best displayed price, and was paid about $0.015 for doing so.

For those struggling to calculate the ROI – return on investment – when you spend a tenth of a penny to generate one and a half pennies, it’s a 1400% return.  Do that over and over, and it’s real money.  Fast Trading is the least risky and most profitable business in the stock market.  You don’t have to do ANY research and your investment horizon is roughly 400 milliseconds, or the blink of an eye.  Time is risk.

For the record, NVDA trades about 300,000 times per day. Do the math. 

Which leads to today’s Market Structure Map singularity – infinite value.  Trades for less than 100 shares sent immediately for execution – that’s a “market order” – must by law be executed.  The Securities Exchange Commission has mandated (does the SEC have that authority?) a “continuous auction market” wherein everything is always buying or selling in 100-share increments or less.

So algorithms almost always chop trades into pieces smaller than 100 shares that are “marketable” – meant to execute immediately.  And retail traders are browbeaten relentlessly to never, ever, ever enter marketable trades.  Only limit orders. That ensconces information asymmetry – an advantage for machines.  Every time I send a marketable trade for execution, I have to check a box acknowledging that my trade is “at the market.”

That’s the truth.  Algorithms pulverize orders into tiny pieces not to make them look like tiny trades, but because tiny trades are required by law to execute.  Large trades are not.  Limit orders are not.  Those both may or may not match.  But tiny trades will. There’s one more piece to that puzzle – the market-making exemption from short-locate rules.  For more on that, go to the youtube channel for sister company EDGE and watch my presentation on meme stocks at The Money Show.

Moral of the story:  The entire structure of the stock market is tilted toward the people and the machines who actually know what’s going on, and away from those who don’t.

Now.  What do you know about the stock market, investor-relations professionals?  You are head of marketing for the stock.  Got that?  Do you know how the stock market works?

If you don’t, you need us.  We know exactly how it works, and exactly what’s going on, all the time.  You should have that information in your IR arsenal. 

Nothing is more important. It’s the starting point.

Data to Know

What should you know about your stock, public companies? 

Well, what do you know about your business that you can rattle off to some inquiring investor while checking the soccer schedule for your twelve-year-old, replying to an email from the CFO, and listening to an earnings call from a competitor?


That’s because you know it cold, investor-relations professionals.  What should you know cold about your stock?

While you think about that, let me set the stage. Is it retail money? The Wall Street Journal’s Caitlin McCabe wrote (subscription required) that $28 billion poured to stocks from retail traders in June, sourcing that measure from an outfit called VandaTrack.

If size matters, Exchange Traded Fund (ETF) data from the Investment Company Institute through May is averaging $547 billion monthly, 20 times June retail flows. Alas, no article about that.

You all who tuned to our Meme Stocks presentation last week (send me a note and I’ll share it) know retail money unwittingly depends on two market rules to work.

Illustration 91904354 / Stock Market © Ojogabonitoo | Dreamstime.com

This is good stuff to know but not what I mean. Can you answer these questions?

  • How many times per day does your stock trade?
  • How many shares at a time?
  • How much money per trade?
  • What’s the dollar-volume (trading volume translated into money)?
  • How much of that volume comes from borrowed stock every day?
  • What kind of money is responsible?
  • What’s the supply/demand trend?
  • What are stock pickers paying to buy shares and are they influencing your price?

Now, why should you know those things?  Better, why shouldn’t you know if you can? You might know the story cold. But without these data, you don’t know the basics about the market that determines shareholder value.

Maybe we don’t want to know, Tim.

You don’t want to know how your stock trades?

No, I don’t want to know that what I’m doing doesn’t matter.

What are we, Italians in the age of Galileo? What difference does it make what sets price?  The point is we ought to know. Otherwise, we’ve got no proof that the market serves our best interests.

We spend billions of dollars complying with disclosure rules. Aren’t we owed some proof those dollars matter?

Yes.  We are.  But it starts with us.  The evidence of the absence of fundamentals in the behavior of stocks is everywhere.  Not only are Blackrock, Vanguard and State Street the largest voting block for public companies and principally passive investors, but the majority of trading volume is executed by intermediaries who are not investors at all.

Stocks with no reason to go up, do.  And stock with no reason to go down, do.  Broad measures are not behaving like the stocks comprising them.  Over the whole market last week, just two sectors had more than a single net buying day:  Utilities and Energy. Yet both were down (0.9%, 1.3% respectively). Somehow the S&P 500 rose 1.7%.

You’d think public companies would want to know why the stock market has become a useless barometer.

Let me give you two examples for the questions I asked.  Public companies, you should be tracking these data at least weekly to understand changing supply/demand conditions for your shares.  And what kind of money is driving shareholder-value.

I won’t tell you which companies they are, but I’ll tweet the answer tomorrow by noon ET (follow @_TimQuast).  These are all 5-day averages by the way:

Stock A: 

  • Trades/day:  55,700
  • Shares/trade: 319
  • $/Trade: $4,370
  • Dollar volume:  $243 million
  • Short volume percent: 51%
  • Behaviors:  Active 9% of volume; Passive, 36%; Fast Trading, 32%; Risk Mgmt, 23% (Active=stock pickers; Passive=indexes, ETFs, quants; Fast Trading=speculators, intermediaries; Risk Mgmt=trades tied to derivatives)
  • Trend: Overbought, signal predicts a decline a week out
  • Active money is paying:  $11.60, last in May 2021, Engagement is 94%

Stock B:

  • Trades/day:  67,400
  • Shares/trade: 89
  • $/Trade: $11,000
  • Dollar volume:  $743 million
  • Short volume: 47%
  • Behaviors:  Active, 8% of volume; Passive, 24%; Fast Trading 49%; Risk Mgmt, 19%
  • Trend: Overbought, signal predicts declines a week out
  • Active money is paying:  $121, last in June 2021, Engagement is 81%

The two stocks have gone opposite directions in 2021.  The problem isn’t story for either one. Both have engaged investors. Active money is 8-9%.

The difference is Passive money. Leverage with derivatives.

Would that be helpful to boards and executive teams?  Send this Market Structure Map to them.  Ask if they’d like to know how the stock trades.

Everybody else in the stock market – traders, investors, risk managers, exchanges, brokers – is using quantitative data.  Will we catch up or stay stuck in the 1990s?

We can help.

440 Market

How durable is the US stock market?

It sounds like we’re talking about shoes.  Can I wear these hiking? Are they waterproof?

No, it’s a legitimate question, a fair comparison.  Public companies, your capacity to raise capital, incentivize your executives, and deliver returns to shareholders in large part depends on the stock market’s ability to reflect what you’re doing as a business.

And investors, how do you know you can trust the market?

Trust is the bedrock of commerce.  The founders of our republic thought you couldn’t have confidence in transactions involving the exchange of time for money, or goods for money, if the value of the money wasn’t constant.  It was thought back then essential to assure the people that their money would not be misused or devalued.

In the same sense, I think it’s right to expect assurances about the market.  Our retirement accounts are there, by the trillions.

I think pooling public capital and trusting its deployment to smart, seasoned people is a bedrock capitalist principle. People and money are the pillars of productivity – labor and capital.


We can generally concur that prudent deployment of capital is good. Putting money in the hands of smart, experienced people is a winning idea.

We agree, I expect, about the need for a system of uniform justice.  If a dispute arises about the way money has been handled, you’re owed recourse, redress, due process.


Then there’s the probity, the integrity, of the capital markets.  It’s as important to know you won’t be jobbed by the commercial market for your public investments as it is to have clear, speedy and reliable jurisprudence.

But the big question hangs there.  Do we have that kind of stock market?

To that point, I’m speaking to my dear investor-relations family, the NIRI Rocky Mountain Chapter, tomorrow as part of a program on macroeconomics and market structure. Guess which piece I’ve got? Come join us!  It won’t be boring.

It’s always been important to understand things.  Money.  Government.  Economics. Markets.  The harder these become to comprehend, the more we should ask why.

I understand the stock market.

Reminds me of a line about bitcoin I saw on Twitter, and I think I’ve shared it before so apologies: I’ve never understood bitcoin. On the other hand, I’ve never understood paper money either.

Rather than valuation metrics I see the stock market as machinery.  I grew up on a cattle ranch where the motto was “hundreds are nice, but we need thousands.”  We fixed everything, welded everything, patched everything.  We paid attention to the machinery because we owned it no matter how old it was, and our livelihood depended on it.

My point is it’s not valuation that necessarily determines the health of a market. It’s the machinery creating the valuation. 

Country singer Eric Church laid down a tune for the ages in 2016, Record Year. One of the best songs ever.  The following year, 2017, was a record for ETFs, which saw almost $500 billion of inflows, data show.

And between then and now, trillions of dollars more have followed, leaving the allure of superior Active returns for the durable machinery of Passive crowd-following.

Not surprisingly, Active Investment is down almost 40% as a percentage of daily US trading volume since 2017.

The weird thing, so is Passive Investment.

As market volume has risen from about $250 billion daily in 2017 to $625 billion so far in Jan 2021, investment of both kinds is down almost 75%.  And speculation and derivatives – substitutes for stocks – are up more than 50%.

Wow, right?

I think it means Passive money isn’t adjusting to rising valuations, leaving itself dangerously out over the skis, as we Alpine folks say on steep slopes.

I don’t think the machinery is about to collapse. But. Let me tell you one more story.

We had a gorgeous John Deere 440 that came with the ranch. It was old. And orange, and easy to drive and full of superfast hydraulics for the blade, the backhoe. Fine machinery.  And it left us too often with a slipped track supine in the river with the busted metal heavy on the fast-flowing river-bottom. Or on hillsides. And in ditches.

Love. Hate.  Like the stock market.

The stock market is sleek and lovely. But the hydraulics are hot and we’re crawling the tracklayer through fast waters. I’m concerned that Passive money isn’t keeping up, that the market is reliant on things that don’t last.

It’s not fear.  It’s prudence that leads me to keep an eye on the tracks and not the trading multiples.  And we have that data for you.

Don’t forget to join us at the NIRI Rocky Mountain session today!


How does the stock market work?

That’s what somebody was asking at the online forum for my professional association, NIRI.

By the way, the NIRI Annual Conference is underway.  I enjoyed yesterday’s sessions and seeing the faces of my colleagues in the virtual happy hour.  We’ve got two more days.  Come on! We’ll never have another 2020 Covid-19 Pandemic Annual Conference.

So, I’m not knocking the question. The discussion forum is a candid venue where we talk about everything but material nonpublic information.

Investors and traders, how do you think the stock market works?

My profession exists because there are companies with stock trading publicly. Otherwise, there’s no reason to have an investor-relations department, the liaison to Wall Street. IR people better know how the stock market works.

So it gets better. The question that followed was:  What is IR?

Is that infrared? No, “IR” is investor relations. Liaison to Wall Street. Chief intelligence officer. The department that understands the stock market.

So, why is my profession asking how the stock market works? And why, since we’ve been a profession for over a half-century, are we asking ourselves what our job is?

I think it’s because we’re uncertain. Fearful. Grasping for purpose.

We shouldn’t be. The IR job is knowing the story, governance, key drivers in the industry and sector, and how stock-market mechanics affect shareholder value. Internal politics. External rules. Communications best practices.  We are communicators, data analysts.

That’s it.

So how does the stock market work? Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which became law in May that year, required the SEC to give Congress an answer.

It did, in this 100-page report released in Aug 2020. The government always takes longer to describe things than the private sector.  No profit motive, you know. But still. Do we think the SEC is making stuff up?

They’re not. I’m a market-structure expert. The SEC presents an exceptionally accurate dissection of how the stock market works, the effects of algorithms, the inherent risks in automated markets.

Did you get that, IR people?  The SEC understands the market. Traders do. Investors do. Shouldn’t we?  It’s the whole reason for our jobs.

If you’re offended, apologies. It’s time for our profession to be a little more David, a little less Saul.  A little more huck the stone at Goliath, a little less cower in the tents.  I studied theology, so if my analogy baffles, see the book of I Samuel in the bible, roughly the 17th chapter.

It’s literature for atheists and believers alike. It’s about knowing what you’re doing, fearlessly.

Here’s the stock market in 120 words, boiled down from 100 SEC pages:

There is a bid to buy, an offer to sell. These are set in motion each trading day by computers. The computers reside in New Jersey. Half the daily volume comes from these computers, which want to own nothing and make every trade. The equations computers use are algorithms that buy or sell in response to the availability of shares, and almost half of all volume is short, or borrowed. Stock exchanges pay computerized traders to set prices. About 40% of volume is Passive or model-based investment, and trades tied to derivatives like options. About 10% is buy-and-hold money. The interplay of these behaviors around rules governing stock quotes, trades and data determines shareholder value. And it’s all measurable.  

If you want to see these ideas visually, here they are.  IR people, it’s a mantra.

What do you tell your executives?  They need to hear these 120 words twice per month. Once a week would be better.  Visually. What part of your board report reflects these facts?

“I don’t describe the stock market.”

Oh? Stop fearing. We’ll help. What do those 120 words above look like through the lens of your stock? Ask. We’ll show you.

Let’s stop wondering how the stock market works and what IR is. IR is the gatekeeper between shareholder value and business execution.  Math. Physics. A slung stone. A board slide.

Let’s be IR. Fearless.