Tagged: TSLA

Weird

This is weird. 

I’m traveling to an actual business meeting, by aircraft, and I intend to wear a suit.

Illustration 155967106 / Dune © Rolffimages | Dreamstime.com

There are many things in our society that I had considered weird but these two were not among them.  It’s pretty weird seeing Will Smith slap Chris Rock, who took it with aplomb while the Hollywood audience weirdly applauded.

But that’s not what I was thinking about.

Currently among the weirdest – by no means alone – is the divide between what people think is true about the stock market and what actually is. 

Which I suppose makes it somewhat less weird that my suit-wearing face-to-face is with American manufacturing firms in Atlanta at the MAPI conference. That’s the Manufacturers Alliance for Productivity and Innovation.

I’ve been invited to talk about how Passive Investment profoundly shifts the center of gravity for the investor-relations profession, liaison to Wall Street.

Glad to see these companies caring about their stock market.

And it’s not ESG causing the big shift.  Without offense to those advocating the hot ESG zeitgeist gusting globally, it’s yet another way for public companies to do qualitative work turning them into quantitative trading products.

You may not like that characterization. Well, scores are quantitative measures. Score something, and somebody will trade that score against another – exactly the way sports athletes are, or wine-rankings are, or restaurants on Open Table are.

Long-only investment is qualitative, like writing an essay.

Well, get this.  Active Investment is almost 50% higher in SPY, the S&P 500 ETF, than it is on average in stocks actually comprising the S&P 500.

Public companies, it means stock-pickers invest more in SPY than in the fundamentals of individual stocks. That is a statistical and irrefutable fact.

The problem isn’t you. The problem is the market. 

SPY has a 50-day average of 1.2 million trades per day, and over $53 billion of daily dollar flow. TSLA alone comes remotely in range at $25 billion, half SPY’s colossus. AAPL is a distant third at $15 billion.

Public companies continue to do ever more to ostensibly satisfy what investors want.  And they’re buying SPY.

If the SEC persists in implementing regulations with no precedent legislation – which will mark a first in American history – soon you’ll face mandatory climate disclosures.

So, from the Securities Act of 1933 implementing reporting rules for public companies, through 2022, the amount of information issuers are required to disgorge has become a sandstorm right out of the movie Dune. 

And investors are just buying SPY.

That should exercise you, public companies.  You bust your behinds delivering financial results, blowing sums of Congressional proportion populating the fruited plain with data.

And investors just buy a derivative, an ETF with no intrinsic value or story or results.

Years ago we studied the SPY data, measuring creations and redemptions and trading volume in the world’s largest ETF. We found that 96% of it was arbitrage – aligning SPY with the basket of 500 stocks it tracks.

But because the amount of Active Investment is significantly greater in SPY than the average one of those 500 stocks, we know stock-pickers well outside the S&P 500 are simply using it as a proxy for bottom-up investing too.

So, what should we do as a capital-markets constituency? 

The first rule of holes is when you’re in one, stop digging.  If we want to dig something in, how about our heels?  The entire contingent of public companies should rise up and tell regulators to pound sand.

That you will no longer comply with any further disclosures until the SEC makes markets more hospitable to the investors we work our fingers to the bone to court.

Because it’s not working. 

Why?

The SEC has overridden the stated purpose of the law that created it – notwithstanding that Congress had no Constitutional authority to regulate financial markets in the first place because the states never delegated it by amendment to federal government – which is to foster free, fair and unimpeded capital markets.

Instead the SEC decreed that the purpose of the market would be a continuous auction. Creating prices. And so investors are forced to own things with enough prices to permit them to get in and out.

For stupidity, it’s right up there with Will Smith slapping Chris Rock.

But we’ve got ourselves to blame. Public companies have not cared enough about the market to even pay attention to how it works. So we have a market that sets vast numbers of prices but impairs investment.

If you want to know how the stock market works, use our Market Structure Analytics for a year.  See what really happens. Then you can fight back. Maybe you’ll be moved to storm the regulatory Bastille and bring an end to this aristocratic crap.

That would be weirdly and wildly and wonderfully beautiful.

Message vs Messages

It’s earnings season. Across the market, companies beat expectations and lift guidance and stocks decline. 

Huh?

I can offer a broad array of cases.  Take TSLA.  Massive quarter, monstrous boost to forward views.  Stock declines.

And yes, I Tweeted before TSLA reported that its price would probably fall.

A Consumer Staples stock beat all the key metrics, lifted guidance. Stock fell 10%, another 10% in following days.

There’s a figure that explains what’s happening: 350 billion. 

That’s the number of order messages processed on a single March day this year by the NYSE, according to head of equities Hope Jarkowski in a TABB Forum interview.  It was a new highwater mark for the exchange, where the previous record in March 2020 was 330 billion.

What’s that got to do with reporting great numbers and seeing your stock swoon? Public companies and investors both deserve to know, and the answer is there in the mass pandemonium of message traffic.

When billions of messages for stock orders are flying around, that’s not rational behavior. That’s money moving near the speed of light.  That’s speculation.

The market is crammed with it.

And what are we doing, public companies (investors, I’ll come to you in a bit)?  We’re prepping our numbers and expecting the stock to reflect what those say, good or bad.

Too many of us are still leading our boards and executive teams to think the numbers drive the stock, even though it’s 2021 and we’ve had this high-speed chaff-winnowing market since 2007 when Regulation National Market System was implemented.

It’s part of the investor-relations job to know the ORDER MESSAGES, not the message, drive the stock. About 350 billion of them on high-traffic days at just the NYSE Group of five stock exchanges and two options markets.

And why does the NYSE operate seven stock and options markets if an exchange is supposed to AGGREGATE buy and sell interest?

Because they’re NOT aggregating buy and sell interest. They want message traffic, a lot of orders.  This is why you need firms like ModernIR, a check and balance on the exchanges, which don’t tell you what the money is doing.

The image here comes courtesy of IEX, the Investors Exchange, and shows how bursts of trades – which flow through messaging traffic – come from proprietary trading firms within two milliseconds of changes in price.

For comparison, hummingbirds flap their wings about 80 times per second, equivalent to about once every 12 milliseconds.  So in a fraction of the flap of hummingbird wings, your entire market structure could shift from positive to negative.  Rational? Nope.

Case in point.  I bought 200 shares of NCLH at the market and it executed at the NYSE RLP.

What’s that?  My broker, Interactive Brokers, is a Retail Member Organization.  It can execute the trade for a tenth of a penny higher than the offer at the NYSE’s Retail Liquidity Program, where a high-speed trader can earn three cents per hundred shares for filling my order.

And if the seller is a NYSE Designated Market Maker (see page 20 here), it’s 20 cents per hundred, 40 cents to sell me 200 shares at one-tenth of a penny better than the best displayed price.

Got that? Sure, I got $30.169 instead of $30.17.  Oh boy. But talk about convoluted.  Why the hell would an exchange do that?

For 350 billion reasons.  Traffic is data. The RLP and my broker set the best bid and offer. That’s money – literally.  Data is money. Best prices are data. We’ve all been buffaloed into believing a tenth of a penny matters. No it doesn’t. We’re being gamed, merchandised.

The more platforms, the more prices, the more data – and especially if five are stocks and two are options on those stocks.    

That’s why your shares implode on results.  Suppose a million of those messages are a bunch of parties shorting, and the market tips the other way in tenths of pennies on hummingbird beats?  In the case of the Staples stock above, over 72% of volume that day was short – borrowed. Not story. Just data. Bets exchanges fill.

So the whole food chain of order-flow messages and order types to take advantage of a retail trade or pay a high-speed trader to be the best bid or offer can cook the market.

Now, why is that all right with you, public companies?

Part of the answer is not knowing enough about the stock market.  We can help.

Investors, this is your market too. I looked at TSLA Market Structure Sentiment. Peaked and falling. Probability is the stock declines. Doesn’t matter what Elon Musk says.

You’re better to trade using Market Structure Sentiment. Stocks can’t be relied upon to behave rationally.  They DO follow supply and demand.

Other than that, everything’s fine.

Hacky Sack Stocks

“We track everything in our facilities, down to the number of gloves we use. Why wouldn’t we track everything in the market? Our primary purpose is creating

shareholder value.”

So said one of the investor-relations rock stars of the modern era over dinner with executives on a non-deal roadshow.

I learned about it by phone this week. In a non-Pandemic year I visit as many clients as I can.  I don’t miss the airports. I do miss the faces.

In 2020, I’m calling clients, the old-fashioned way to hear these fabulous examples of great IR leadership.

What did the execs think of the answer?  They loved it so much that this person is now in charge of corporate development and other business initiatives.

This IRO introduced market structure to the board of directors.  Nobody had.  They recognize now that story is just one driver of shareholder value, and not the biggest.

Now, maybe you quail at the thought of getting more responsibility by demonstrating value and leadership.  I get it. Most of us are pretty busy already.

But if adding value for your organization is on your list in 2021, IR professionals, here’s a simple way.  Teach your board and executives the basics of the market. Who else is going to do it?

Another person doing a great job teaching execs how the market works is hacky sack expert Clay Bilby, who found a creative use for the ModernIR stress ball from the NIRI Annual Conference box of goodies.

Which reminds me of a story. It’s holiday season, and it’s been a long year!  We could all use a good story, right?

So our friends Peter and Bruce are the faces and feet behind the World Footbag Association here in Steamboat Springs.  Peter said, “Did I tell you about the time I slept with Kevin Costner?”

After we recovered from the surprise, we said no, we had not heard that story. Turns out Peter was hired to teach Kevin Costner how to kick a hacky sack around for the movie Silverado.  There’s a scene in this western packed with Hollywood stars where Costner is in a jail cell.

The plan called for Costner to whack the hacky sack around in his boots behind bars. They worked and worked on it, but according to Peter, Kevin Costner doesn’t have the hacky sack gene.

Weary from the effort and waiting for other scenes to be shot, Kevin says to Peter, “Hey are you tired?  I’m beat.  I’ve got a trailer here.  You want to catch a nap?”

Peter said, “I could use a few winks.”

And so they went to Costner’s trailer and crashed for a couple hours. And that’s how Peter slept with Kevin Costner.

Alas, the hacky sack scene landed on the cutting floor.  But the story lives on.

In a way, your stock is a hacky sack.  It gets kicked all around the stock market, through 15 exchanges and over 30 alternative trading systems because it must constantly move to wherever the best price resides.  That’s the law. Regulation National Market System.

It’s why more than 53% of trading volume in the S&P 500 the past week through yesterday – during huge index rebalances and options-expirations – was Fast Trading. The hacky sack players of the stock market, kicking the bag all over the place.

And they were the top price-setter the past five days.

Investment driven by fundamentals (Active), and flows from indexes, Exchange Traded Funds and quant funds (Passive) actually declined 6% last week, a key reason the market has been down.  More hacky-sacking, less investment, stocks fall.

In fact, if supply and demand were perfectly balanced, stocks would decline.  Why? Because the bid to buy will always be lower than the offer to sell, and 53% of the market’s volume comes from hacky sackers paid about a half-penny at a time to kick it around.

Also rising to over 18% of volume in the S&P 500 last week were trades tied to derivatives (Risk Mgmt). That is, 18% of the time last week in a given stock such as TSLA, a trade occurred because somebody had to buy or sell stock tied to puts or calls.

Add those up. It’s 71% of market volume.  The remaining 29% was investment, about 9% tied to stock-picking, 20% following indexes, models.

That’s market structure. It’s no harder than hacky sack.  Unless you’re Kevin Costner. And we’ll coach you. Just ask.

Resolve to make 2021 the year when your board knows what market structure is.  But before that, we hope your holiday season, however you mark it, is full of joy and gratitude, peace and reflection, and cheer.

We feel those feelings for all of you.  Happy Holidays!  We’ll see you on the other side.

Boxes and Lines

 

In the sense that high-speed transmission lines connecting computerized boxes are the stock market, it’s boxes and lines.

Also, stock exchange IEX, the investors exchange, hosts a podcast called Boxes and Lines that’s moderated by co-founder Ronan Ryan and John “JR” Ramsay, IEX’s chief market policy officer. I joined them for the most recent edition (about 30 mins of jocularity and market structure).

In case you forget, the stock market is not in New York City.  It’s in New Jersey housed in state-of-the-art colocation facilities at Mahwah, Carteret and Secaucus.  It’s bits and bytes, boxes and lines.

It’s superfast.

What’s not is the disclosure standard for institutional investors.  We wrote about the SEC’s sudden, bizarre move to exclude about 90% of them from disclosing holdings.

The current standard, which legitimizes the saying “good enough for government work,” is 45 days after the end of the quarter for everybody managing $100 million or more.

We filed our comment letter Monday.  It’ll post here at some point, where you can see all comments. You can read it here now.  Feel free to plagiarize any or all of it, investors and public companies. Issuers, read our final point about the Australian Standard of beneficial ownership-tracing, and include it with your comments.

Maybe if enough of us do it, the SEC will see its way toward this superior bar.

Without reading the letter or knowing the Australian Standard you can grasp a hyperbolic contradiction. The government’s job is to provide a transparent and fair playing field.  Yet the same SEC regulates the stock market located in New Jersey. Boxes and lines.

FB, AAPL, AMZN, NFLX, GOOG, GOOGL, MSFT, AMD, TSLA and SHOP alone trade over 2.5 MILLION times, over $80 billion worth of stock. Every day.

And the standard for measuring who owns the stock is 45 days past the end of each quarter.  A quarter has about 67 trading days, give or take.  Add another 30 trading days.  Do the math.  That’s 250 million trades, about $7.9 trillion of dollar-flow.  In 10 stocks.

Why should the market function at the speed of light while investors report shareholdings at the speed of smell? Slower, really.

Do we really need to know who owns stocks?  I noted last week here and in our SEC 13F Comment Letter both that online brokerage Robinhood reports what stocks its account holders own in realtime via API.

That’s a communication standard fitted to reality. True, it doesn’t tell us how many shares. But it’s a helluva better standard than 97 days later, four times a year.

Quast, you didn’t answer the question.  Why does anyone need to know who owns shares of which companies? Isn’t everybody entitled to an expectation of privacy?

It’s a public market we’re talking about.  The constituency deserving transparency most is the only other one in the market with large regulatory disclosure requirements: Public companies.

They have a fiduciary responsibility to their owners. The laws require billions of dollars of collective spending by public companies on financial performance and governance.

How incoherent would it be if regulations demand companies disgorge expensive data to unknown holders?

As to retail money, the Securities Act of 1933, the legislative basis for now decades of amendments and regulation, had its genesis in protecting Main Street from fraud and risk.  The principal weapon in that effort has long been transparency.

Now, the good news for both investors and public companies is that you can see what all the money is doing all the time, behaviorally. We’ve offered public companies that capability for 15 years at ModernIR.

Take TSLA, now the world’s most actively traded – we believe – individual stock. SPY trades more but it’s an ETF.  Active money has been selling it.  But shorting is down, Passive Investment is down 21% the past week.  TSLA won’t fall far if Passives stay put.

That’s market structure. It’s the most relevant measurement technique for modern markets. It turns boxes and lines into predictive behavioral signals.

And investors, you can use the same data at Market Structure EDGE to help you make better decisions.

Predictive analytics are superior to peering into the long past to see what people were doing eons ago in market-structure years. Still, that doesn’t mean the SEC should throw out ownership transparency.

Small investors and public companies are the least influential market constituents. Neither group is a lobbying powerhouse like Fast Traders.  That should warrant both higher priority – or at least fair treatment. Not empty boxes and wandering lines.

PS – Speaking of market structure, if you read last week’s edition of the Market Structure Map, we said Industrials would likely be down. They are. And Patterns say there’s more to come. In fact, the market signals coming modest weakness. The Big One is lurking again but it’s not at hand yet.