September 3, 2014

Without Your Knowledge

Facebook collaborated with two respected universities to study your emotional responses when shown different kinds of news. Without your knowledge.

We learned in June, you might recall, that Cornell, the University of California at San Francisco and Facebook delved into the doings and feelings of 700,000 of us folks without so much as a by-your-leave. The aim was unalloyed, as aims often begin when people sit in rooms with statistics and contemplate how to study them.  Do users post negative prose if they’re exposed to adverse news?

It seems innocuous, sure. I’m not knocking the social network and that’s not the point of today’s piece. If you’re sharing your innermost feelings with a community of one billion, your expectation for inclusion on the distribution list for the memo about a psychological study should be a number approaching zero.

Speaking of memos you didn’t get, we wrote two weeks ago that the SEC had in June ordered the stock exchanges and Finra, regulator for brokers, to craft a program for larger tick-sizes in small-caps. The plan is out. Without input from public companies. But you can yet weigh in. We’ll come to it.

There are four groups, not three as we’d initially thought. The three test groups will contain about 400 entities each with prices over $2, volume under a million shares, and market-cap of $5 billion or less, and will study trading in five-cent increments.

Lest you suppose this is the backwater of the market, there are only 754 large-cap companies in the Wilshire 5000.  Not enough to constitute two test groups. Most of the stocks trading publicly fit criteria for this proposed program.

That makes this plan more than a test. It’s a functional repudiation of Regulation National Market System. But instead of admitting its errors, the SEC simply ordered the exchanges to propose an alternative, thus permitting regulators to sidestep responsibility for screwing up 80% of the marketplace.

Summarizing the plan, the control will trade as it does now, while the first test group will show spreads of five cents between best prices to buy or sell shares but trade at any price between. The second will enforce trading at five-cent spreads with exceptions for midpoint trades, retail orders and negotiated prints (volume-weighted or time-weighted execution). The third will also trade in five-cent increments but with a trade-at rule prohibiting sales at prices different from the best displayed one, an effort to push trading out of dark pools and back to exchanges. But there are 13 exceptions. Why test, then?

I think the exchanges and the SEC, both desperate for trading volume, looked at the data and discovered that all the trading is in the 20% of issues with 80% of market-cap. It’s a cabal of traders, exchanges and regulators. Structure is failing. So this plan hopes to push volume into the dying small-cap roots of a stock market riven with large-cap arbitrage.

Look, we’re for reform!  But our mantra never changes: Involve issuers. Provide data that matters.  It was June 5, 2014, when SEC Chair Mary Jo White said: “The secondary markets exist for investors and public companies, and their interests must be paramount.”

Is it true, or ain’t it? A plan that excludes these constituents hardly exudes eminence. So call your investors and get them to weigh in too. Keys for issuers:

1.      There is no issuer constituency in this plan at all.

2.      There is no issuer representative in what the plan calls the Designated Examining Authority, vested with measuring success.

3.      Assessment criteria address intermediary profitability and economics. No surprise since the plan was crafted by intermediaries.  But discrimination against issuers is prohibited under the Securities Act. Markets don’t exist to ensure profits for exchanges and traders but to match investors and growing enterprises.

4.      The data to be offered publicly are laughable. In Canada you can know as an issuer exactly which broker traded your shares within a day.  Under this plan, no market-maker information is offered publicly.  How are issuers to determine who makes markets well and who doesn’t?

5.      Why don’t issuers have the right to opt out or in?  Are public companies chattel?  Give them a subsidy for tools and they’ll pay no attention to what’s occurring?

The good news is you can say something. The SEC will shortly follow with a 21-day comment period on this plan.  We’ll alert you where to comment. If you’ve never submitted a comment letter before, ask us!  We’ll help.

Now, make it a goal to speak up. Otherwise, we all deserve barcodes.

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