February 8, 2023

The Cost

Jay Powell reads fiction and plays guitar. 

Interviewer David Rubenstein, a founder of The Carlyle Group, was downright funny talking to the Federal Reserve chair yesterday.  He said, “Your hair is pretty short for a guitar player.”

He also asked Mr. Powell if he ever got calls from people like the President.  Mr. Powell said, “I think it’s not a secret that President Trump used to call me.”

Mr. Rubenstein said, “What’d he call you?”

And the stock and bond markets were all over the place.  Do machines listen and react?  Well, my phone does. I see no reason algorithms don’t do the same.

Illustration 25917969 © Artistashmita | Dreamstime.com

I can tell you the trillions of dollars in target-date and balanced and risk-adjusted and blah blah funds, aren’t juking and jiving on whether Jay Powell laughs or frowns. 

I had a lengthy conversation with a veteran of market structure. That’s what this is – the stuff occurring in the stock market.  I’d tell you who but I didn’t ask if I could.  He was an early pioneer in electronic trading, built smart order routers.

We talked about the SEC’s proposed new regulations and the effect on the stock market if this or that item were approved.  He said the SEC tried an auction system over twenty years ago, called Primex.  The idea was to give orders access to an auction rather than just another market-maker.

“It was like the sound of one hand clapping,” he said. Nobody showed up.

He finds it amusing that the SEC is proposing the same failed solution for retail orders.

And we talked about issuers some.

In 2001 when I became the IR guy for Nasdaq-listed Surewest Communications, I recall our listing fees to be about $30,000.  We had well less than 30 million shares outstanding.

And 100% of our trading occurred at the Nasdaq (there were exceptions on Electronic Communications Networks but follow me here).

Today, the Nasdaq listing fee for up to 30 million shares is $150,000.  The Nasdaq has 16% market-share of trading.  And 45% of trading doesn’t even occur on exchanges.

So the Nasdaq offers a batch of services to IPOs that in effect return some part of listing fees (which the exchange can expense, improving margins, much like a rate-of-return regulated utility can do).

I’m not picking on the Nasdaq.  The NYSE does the same thing.

In fact, I’m not picking on the exchanges.  I’m saying well-informed issuers would ask better questions.  What do you pay an exchange for if 45% of your volume trades at brokers? At minimum, seems like your listing should cost 45% less.

Better, if 40% of your trading occurs at exchanges you’re not paying, why pay at all?

What is the most valuable thing in the stock market? 

A trade.

Can’t exist without issuers.

A trade is wildly lucrative.  I executed 19 trades yesterday.  A trade for 99 shares (less than 100 shares, at the market) of SU sold in a dark pool for $33.0838 per share. The bid/ask spread was a penny.

A trading firm made 60 cents (62 hundredths, times 99).  My broker charged me about $1.09 (I pay a commission for this data) per trade.

Issuers should, as I’ve said before, know how much money market intermediaries make. Exchanges, brokers, market-makers, are intermediaries. One, Citadel, made $16 billion last year. There are 20 more firms like that.

I’ll go back to my favorite comparative. Grocery stores run on 2-3% margins.  The stock market is a grocery store with 30-50% margins. That suggests the consumers in the market are ill-informed.

Just 10% of consumption is your long-onlys, issuers. They don’t understand market structure either. And public companies, money is vastly more efficient and less expensive in private equity than in public equity.

I pull my hair out when I then see investor-relations people talking about digital annual reports or adding slides to earnings calls or targeting investors.

Do those things add a single penny to shareholder value?

Did Tech collapse in 2022 and rise 30% in 2023 on stories? No data shows that spending money to attract the 10% overrides the behavior of the other 90%. But we go right on spending it, and paying huge listing fees.

I hope the incoming generation of IR pros will rethink our profession, starting with how the market works, what the money is doing, and whether public equity markets are properly priced and structured. 

After we get that part right, we can think about what’s controllable in how money interacts with traded shares.  And I think it may be true that stocks are for the foreseeable future products, not stories.

In a recipe, there are ingredients. Investments have become recipes. There’s flour, sugar, salt, oil, etc. You don’t tell the story around the flour. You measure it, allocate it.

Yes, there are stock-pickers, but the great majority of volume in the market treats stocks as ingredients, so the value-input from the story is subsumed by how money allocates to products – equities vs bonds.

What should the IR role be in this market? The expert who ensures that shareholder capital is used efficiently. Right now, we’re the most inefficient part of the market. There’s a lot of opportunity to increase our impact.

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