Happy 2nd Half of 2020! I bet we’re all glad we’re halfway there. Karen and I would’ve been in Greece now sailing the Ionian islands, luxury catamaran, sunset off starboard, Hurricane in hand.
Instead my checklist leaving the house has expanded from wallet, phone, keys, to wallet, phone, keys, mask. No vacation for you. Just a Pandemic and executive orders.
A CEO of a public company said, “Why does my stock trade only 60 shares at a time, and how do I fix it?”
I was happy the team at ModernIR had highlighted shares-per-trade (one of several liquidity metrics we track). Every public-company CEO should understand it.
After all, your success, investor-relations folks selling the story to The Street (and investors, whether you can buy or sell shares before the price changes), depends on availability of stock. Not how great your story is.
Because there’s a mistaken idea loose in the stock market. We understand supply is limited in every market from homes for sale to shishito peppers at the grocery store. Yet we’re led to believe stocks are infinitely supplied.
This CEO I mentioned asked, “So how do I fix it?”
This isn’t AMZN we’re talking about, which trades less than 30 shares at a time, but that’s over $70,000 per trade. AMZN is among the most liquid stocks trading today. The amount you can buy before the price changes is almost eight times the average in the whole market.
AAPL is liquid too, not because it trades almost $16 billion of stock daily but because you can ostensibly buy $35,000 at a pop, and it trades more than 400,000 times.
Back to our CEO, above. The company trades about 3,000 times per day, roughly $3,000 per trade. Liquidity isn’t how much volume you’ve got. It’s how much of your stock trades before the price changes.
That matters to both the IR people as storytellers and the investors trying to buy it.
I’ve shared several vignettes as I experiment with our new decision-support platform democratizing market structure for investors, called Market Structure EDGE. I couldn’t buy more than 10 shares of AAPL efficiently. My marketable order for JPM split in two (96 shares, 4 shares), and high-speed traders took the same half-penny off each.
The CEO we’re talking about meant, “What can we do differently to make it easier for investors to buy our shares?”
The beginning point, at which he’d arrived, which is great news, is realizing the constraints on liquidity.
But. If you have the choice to buy something $3,000 at a time – oh, by the way, it’s also more than 4% volatile every day – or buying it $70,000 at a time with half the volatility, which “risk-adjusted return” will you choose?
And there’s the problem for our valiant CEO of a midlevel public company in the US stock market today. Fundamentals don’t determine liquidity.
To wit, TSLA is more liquid than AAPL, over $42,000 per trade.
Forget fundamentals. TSLA offers lower risk.
Ford and GM trade around $4,000 per transaction, a tenth as liquid as TSLA. Heck, NKLA the maker of hydrogen trucks with no products and public via reverse merger is twice as liquid as our blue-chip carmakers of the 20th century.
Prospects, story, don’t determine these conditions. These vast disparities in liquidity invisible to the market unless somebody like us points them out are driven by DATA.
The reason liquidity is paltry in most stocks is because a small group of market participants with deep pockets can buy better data from exchanges than what’s seen publicly. I’ll explain as we wrap the edition of the MSM in a moment.
The good news is the SEC wants to change it. In a proposal to revamp what are called the data plans, the SEC is aiming to shake up the status quo by among other things, putting an issuer and a couple investors on the committee governing them.
I’ve been trying for 15 years to achieve something like this, and so has NIRI, the IR professional association (they longer than me!). I should retire! Mission accomplished.
Heretofore, the exchanges and Finra, called “Self-Regulatory Organizations (SROs),” have been able to create their own rules. In a perfect world full of character, we’d all be self-regulatory. No laws, just truth.
Alas, no. The exchanges provide slow regulatory data to the public and sell fast data for way more money to traders who can afford it.
By comparing the slow data to the fast data, traders can jump in at whatever point and split up orders and a take a penny from both parties.
This happens to popular brokerage Robinhood’s order flow by the way. Those retail customers get slow data, and the traders buying the trades use fast data.
That’s not the problem. The problem is that by buying Robinhood’s order flow at slow-data prices, and selling it at fast-data prices, T Rowe Price’s trades get cut out, front-run, jumped past.
Your big investors can’t buy your stock efficiently (passive money doesn’t care as it’s just tracking a benchmark).
That’s why our CEO’s company trades 60 shares at a time.
For stocks like AMZN the difference between fast and slow is small because they’re the cool kids. And size grows. For the rest, it’s the crows in the cornfield.
You can talk to investors till you turn blue. It won’t solve this problem. The only thing that will is when investors join with public companies and get behind eliminating Fast Data and Slow Data and making it just Data.
We’ve got a shot, thanks to this SEC, and the head of the division of Trading and Markets, Brett Redfearn. We should all – public companies and investors – get behind it. If you want to know how, send me a note.