December 19, 2012

The Dark Arts

No, our title does not refer to Surveillance.  Despite the Thomson/Nasdaq deal last week.

Yesterday mavens of equity markets converged on Capitol Hill to debate trading woes. Apparently the Senate, unsatisfied with just one geological trope (“Fiscal Cliff”), must examine “Dark Pools.”

If you missed the news, we’ll summarize. On the Hill, leaders from the big exchanges argued that operators of trading facilities that don’t post prices and which may select which parties can participate in buying and selling are harmful to investors who want to know the true price and supply of stocks.

As you may know, “dark pools” are markets where equity traders may find shares without having to post a price, thus avoiding actions that might move market pricing or draw attention to orders. The price for shares in dark pools is determined by whatever price is best at the exchanges.

Exchanges naturally feel a bit like Best Buy in an internet world. You’re using our liquidity and our prices to determine what you can get at another market.

For their part, dark-pool operators including Credit Suisse (runs the world’s largest dark pool, Crossfinder) and ITG (operates POSIT) countered that markets are ill-served by an exchange oligopoly that writes its own rules, regulates itself and earns some $450 million in shared data revenue off the consolidated tape that is in effect a government-granted monopoly.

It’s akin to knowing that no matter what you do, if you match up trades at a certain pace you’ll earn a profit on data because it’s guaranteed – almost like rate-of-return utilities. Dark pools think that’s a whopping tradeoff for setting prices everybody else uses.

Joe Mecane, head of NYSE equities, made the point of the day though. The nature of markets fostered by rules has “created unnecessary complexity and mistrust of markets,” Mecane said. He wants Congress to simplify it.

Key lessons, IROs: Number one, do you notice how these discussions don’t mention issuers, without which there would be no exchanges, dark pools, or government-granted data-profits monopoly – and we’d add, no funding for the SEC budget (or any of the funds from IPOs, follow-ons and proxy solicitations that Dodd-Frank re-routed straight to the Treasury).

Second, everybody is petitioning the Senate for fixes. Huh? Isn’t the stock market a quintessential free market? Clearly not. It’s controlled by Government.

Lesson Number Three: What is “capital formation,” the thing the market is supposed to be about? It’s where people with money find businesses with good plans, and together they produce wealth, jobs and opportunity. This seems by simple observation to be sorely lacking, since we have only 600 more public companies now than we did in 1971, using the Wilshire 5000 as a measure.

Instead, we’re yammering to Congress about whether orders for shares and revenue from data are occurring fairly.

Sounds like Dark Arts to us. And not what public companies need. No matter where you fall politically, it’s in the interest of our profession to have more public companies and more IR jobs.

Seems about time for a public-company summit on capital-formation, instead of a debate we all watch from the outside about how our shares trade.

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