January 9, 2013

The IR Jetsons

What surprised me most was how twice as many people knew “high-frequency trading” compared to “dark pools.”

The Nasdaq’s Mike Sokoll, Liquidnet’s Nicole Olson and I kicked off a session on how equity markets work at NIRI’s conference on IR fundamentals in Santa Monica yesterday. As we were unfolding the map of market behavior, we polled the audience:

How many of you have heard of “high-frequency trading?”

It appeared to me that two-thirds of the hands in the room went up, and there were between 80-100 investor-relations and treasury professionals in the ballroom at the Loews Beach Hotel.

And yes. It was lovely there, above Muscle Beach (I walked from the sandy side of the hotel to the front for a cab back to the airport, five minutes in the lovely January sea air in suit and tie).

When we asked how many had heard of dark pools, only a third said so. That may change soon. One big reason more people know about high-frequency trading is that the media have given it ink. Yesterday, FINRA announced plans to scrutinize dark pools over whether gaming occurs, where traders may post orders on stock exchanges that create arbitrage opportunity in members-only markets where no price information is offered (dark pools).

Which leads us to IR 101 in 2013. I was trading notes recently with a friend and fellow IR veteran about the Nasdaq buying Thomson Financial and The ICE buying the NYSE, and we got to talking about what’s changed and what hasn’t in our profession.

Fifteen years ago it was 1998. eBay went public Sept 24 and closed up 163% at $47.38 (raising $63 million on 3.5 million shares offered). IR pros were doing the Big Four (positioning their companies in the capital markets, shaping internal and external financial communications, building capital-markets relationships, monitoring how equity is traded).

Reg FD came in 2000, Sarbanes-Oxley in 2002. A host of regulations including Reg ATS, the Order Handling Rules, Decimalization, the Global Settlement and Reg NMS transformed the stock market from a capital-formation bazaar to an IP network for arbitrage. Companies go public now to exit the capital-formation process, not to enter it.

For IROs, three of The Basics are unchanged. But Number Four. Whew. Too many IR pros (are still monitoring shares the same old way, except with far less effect. Only 30% of trades match at listing exchanges. But not all of you using Market Structure Analytics – you’re the IR Jetsons! Remember the space-age show about Orbit City?

If a derivatives market that didn’t exist fifteen years ago is buying the NYSE, then IR 101 – at least Number Four on the list – absolutely, positively, needs updating.

If all IROs saw trading as mathematically measurable behavior…wow. We could change the world. Maybe instead of trades occurring in milliseconds, settlement in four days, and ownership reports every 120 days with no idea what brokers are responsible for 50% of trading volume, we’d drag all that into the 21st century.

For more on that, tune in next week.

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