Mark Twain said, “Get your facts first and then you can distort them as much as you please.”
The 1959 annual review of Mark Twain’s accounts by his successors in Redding, CT, found that his IBM shares, perhaps once units of the International Time-Recording Co. formed in the 19th century, were worth $148,000.
That’s a little-known fact. By wading through fine print for years, we’ve not only passed on nuggets about humorists, but we’ve also found nifty facts proving trading markets have fundamentally altered the IR job.
We found a couple this week that may surprise you. The 2012 SEC budget reveals that the agency collected about $1.3 billion in “Section 31” fees in 2011.
Every trade earns the SEC a fee. Since 1933, the SEC Act (now US Code, Title 15, Sections 77 and 78) has allocated Section 6(b) fees for securities offerings, 13(e) fees on corporate stock repurchases, and 14(g) fees on proxy solicitation to “recover the costs to the government of the securities registration process…”
Don’t get lost in the b’s, e’s and g’s. Stay with me here.
The cost of regulation should be borne by what’s regulated. But here, facts take a weird turn. The Dodd-Frank Act performed an extreme makeover of these rules. It struck the language dating to 1933 and routed all but the Section 31 fees to the Treasury General Fund. Fact: A chief beneficiary of more complex proxy processes is the US Treasury.
After pillaging the SEC of its enforcement dollars while ballooning its duties, Dodd-Frank mandated that the SEC rely on Section 31 fees. The key driver of Section 31 fees is high-frequency trading. So the SEC is supposed to limit what drives its revenues?
Conflict of interest, anyone?
Plus, Dodd-Frank, in neat statistical tables, mandates SEC appropriations, which rise steadily – and which must be covered by Section 31 fees. It projects them nine years forward and writes into law what contributions the various other section fees will make to the Treasury General Fund. The total rises 66% over nine years, versus 4.5% from 2002-2011. Whatever reality proves to be, the law requires fees collected to adjust to fit mandatory amounts.
Same with Section 31 fees. If trading volumes decline, per-transaction fees rise. Which will likely cause volumes to drop further. But the SEC has no choice. The law is the law.
We got HFT the same way. Lawmakers and regulators decreed decimalization, compulsory separation of research and trading, quote and tape plans that allocate data revenues by market share, and Regulation National Market System provisions permitting variable trading costs and credits for different actions and behaviors. Result: prolific statistical arbitrage and little capital-formation. That’s a fact.
And that’s also how IR professionals and corporate executives confuse volume with liquidity. Liquidity does not change because something passes through many hands rather than one. It’s still one item.
If a guy in a trench coat tells you your business will be more efficient when your product passes through ranks of middle men ten or twelve deep before it reaches the end consumer, be suspicious.
It’s most definitely not a fact.
