Posts Tagged ‘Trading’

Trading at the speed of light

August 10, 2012

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

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IR is still about the long term

May 12, 2011

Among several bits of wisdom shared by Jane McCahon last night at a NIRI Kansas City meeting is the idea that investor relations, at its core, still has the mission of building a base of long-term investors who believe in your company and its future.

McCahon is VP of corporate relations for Chicago-based Telephone and Data Systems and its publicly traded subsidiary U.S. Cellular. She is a longtime IRO with experience in several industries and is a former chair of the NIRI national board.

Measuring the success of IR isn’t about this quarter, McCahon says. Success develops over several years as you develop a group of long-term investors who understand and support the company’s story.

You can do perception studies to evaluate how the relationships are going. But the ultimate measure will come in a moment, sometime in the future, when you need your shareholders – when management needs a critical proxy vote, support in an M&A situation or buy-in for a follow-on offering.

In that moment, if you’ve been doing your job well, you’ll approach those investors and the answer will come: “We’re with you.”

As for the near term, McCahon says, make an annual IR plan and put it into practice. Focus on what you can control or influence, not what you can’t change.

One IRO asked how you deal with high-frequency trading and the daily gyrations of stocks in today’s hyper-short-term market. McCahon’s advice:

You can’t. What’s your title? Investor relations – not trader relations. Yes, you have to be aware of what it is and be explaining these events to people. But there’s nothing you can do about it – move on.

McCahon says one of the best things an IR professional can do is spend 50% to 70% of your time focusing internally: educating management about investors’ feelings, preparing execs to meet with analysts and shareholders, coming up with Q&As and drilling managers, sharing the IR plan and managing internal expectations.

“What’s changed in IR?” someone asked. Well, this led to a big discussion about fax machines. Too many of us in the room remember when fax machines were the coolest new technology for rapid communication with the market. We punched in fax numbers and waited for it to send. Today, who still owns a fax machine?

McCahon suggests, though, that the heart of IR hasn’t changed: It’s finding and cultivating long-term investors for that moment in the future when you need them.

© 2011 Johnson Strategic Communications Inc.

Let’s NOT squash trading

January 20, 2010

As you know from reading the papers, Washington “powers that be” have two impulses when it comes to Wall Street and stock market activity:

  • If it’s an activity where people can lose money, we need to regulate it.
  • If it’s a thing where people can make too much money, we need to regulate it – and maybe just outright squash it.

Following the market’s unfortunate meltdown in 2007-09, and the even more unfortunate fact that Wall Streeters who remain are taking home big bonuses, Congress and the Obama Administration are in full rush to “do something.” You know, do something so “this will never happen again.” No one believes that last part – mostly it’s about casting blame and seeming to punish someone – but they are working on a wave of escalating regulation, which could be very real.

Update: On Jan. 21 President Obama pledged to go after big banks, again using that “never again” language. Among other things he proposed a ban on proprietary trading by banks, curbs on advising hedge funds and limits on involvement in “risky financial products.” Depending on how it’s structured, this might greatly reduce trading – or just drive traders out of mega-banks into smaller firms.

Earlier this week the Kansas City chapters of NIRI and the Security Traders Association put on an educational panel, “Not Your Grandma’s Market Anymore,” on how the new world of trading affects public companies. The Jan. 19 audience was a mix of 50 investor relations people, long-term investors and short-term traders, all in one room.

Speakers were Joe Ratterman, CEO of BATS Global Markets, the No. 3 US equity exchange behind Nasdaq and NYSE; Tim Quast, managing director of ModernIR, an analytics firm that tracks trading patterns for public companies; and Jeff Albright, VP and head of equity trading for mutual fund family Waddell & Reed. I moderated.

In another post, I’ll share ideas from the session on what investor relations people can do amid this new world of trading. But let’s start with Washington – because regulatory excess in trading could do a lot of damage to the markets our public companies depend upon. Some examples of what the power brokers are up to:

  • The Securities and Exchange Commission issued a “concept release” on equity market structure on Jan. 14. It’s a good primer on changes in how stocks are traded. The SEC seeks public comment on how to beef up regulation of market structure, high-frequency trading and “undisplayed liquidity” such as the private markets called dark pools. That’s the start of a push for expanded regulation. I’ll post excerpts in a page called “Not Your Grandma’s Market,” but the full 74-page release is worth reading.
  • Democrats in Congress are proposing a new tax of 0.25% to 0.5% on securities transactions – every trade of stocks, options, futures, etc. Proponents say the tax could raise as much as $354 billion a year for Uncle Sam and curb “speculative excess” by cutting total trading volume, say, 25% to 50%. Those last numbers are, well, speculative – no one knows what the actual impact of lobbing a new tax into the markets would be.
  • The SEC proposes to regulate dark pools, whose very name suggests something sinister – should have sent that one to the branding consultant before going with “dark pools.” They’re generally platforms for securities firms to match orders and do proprietary trades without disclosing price and volume offers. The new SEC rules would bring that trading out into the open.
  • Also targeted by the SEC are flash orders. Flash trading essentially is a way automated traders’ computers can get a peek at pending orders from other investors 30 milliseconds before those orders go to the broader market. The fear is that high-tech trading desks are gaining an unfair advantage.
  • And, of course, the SEC has been tinkering with rules on short selling, a hot button for some companies that have felt victimized on the downside of the market – and another unpopular group of Wall Streeters.

Now, the opinions here are my own – I can’t speak for the other panelists. My takeaway from the discussion was that, yes, technological and regulatory changes of recent years have created a huge new realm that basically is automated trading.

Perhaps two-thirds of the trading volume in US stocks is short-term activity. The traders are math majors who program computers to make or withdraw offers from the market, hundreds or thousands of small trades at a time, in milliseconds. They use algorithms to implement strategies based on tiny anomalies in price, or theories about market movement. The activities go by a bunch of acronyms and names like “high-frequency trading.” They use ultra-fast technology.

And, yes, this trading activity makes life complicated – both for public companies trying to figure out what is happening with our stocks day-to-day, and for individual or institutional investors who may be trying to do a trade for long-term investment but encounter a flurry of “noise” moving the price or spiking volume.

The fact that life has become more complicated, however, doesn’t mean it’s worse – or that trading cries out for a regulatory crackdown. Automated trading certainly was not responsible for the financial meltdown we just came through, and those traders Washington likes to label “speculators” aren’t doing anything wrong.

The societal benefit of short-term trading, as it emerged in discussion, is that when a long-term investor is trying to put a trade on – say, buy 50,000 shares of your stock – the automated traders often are the ones putting up the offers that match that bid and form the other side of the trade. Liquidity comes from more offers, and this lubrication enables people to own stocks less risk of being stuck.

My bottom line: Let’s NOT squash trading. Taxing trades will only add costs, ultimately borne by the people who own equities or mutual funds. And we ought to be very careful about dictating market structure based on an understanding of today’s needs and technologies – which tomorrow will already be changing.

Capitalism thrives in free markets. Rigidity in capital markets will inhibit the flow of money and hinder investment in new technologies yet to be envisioned. And let’s face it, the equity markets (however bumpy) ultimately enable businesses to exist, grow … or in some cases disappear. We don’t want to lock in the status quo.

That’s my two-cents’ worth. What’s your opinion of regulating trading?

© 2010 Johnson Strategic Communications Inc.

Who’s doing this to our stock?

June 26, 2009

BlueCandlestickGraphAs investor relations people we should always, always be students of the market. We should keep on digging to understand capital markets as a whole – and specific supply-and-demand dynamics of the stocks we are hired to understand.

I like the perspective offered by Tim Quast, managing director of Modern IR, an equity market analysis and consulting firm, in a post called “Did a Market Strand Snap?” in the company’s online Market Structure Map. He describes the market for your company’s stock as three strands braided together:

If the three-strand cord that constitutes your price and volume braids rational investment, speculation and risk-management, which one just snapped? Anyone? Anyone?

To refresh, we at ModernIR say most buying and selling in the markets comes from those three sources. There are real, rational investors deploying capital and taking profits, and portfolio managers adjusting their asset balances and associated hedges to manage risk. Around those, speculators engage in various trading tactics. We believe at least 95% of volume for a given issue ties to one of these threads. Sometimes human traders drive it and other times computers do. The machines dominate today.

So something dramatic happens to your stock. “Who’s doing this?” Is it real investors, who after all are the target of almost all IR activity – and the people CEOs and CFOs like to think about? Is it a subset of managers putting on a particular hedge, which may move your stock because of industry, index membership or some kind of arcane characteristics? Or are you being swept up in a speculative play?

Not easy questions to answer, at least without support from outside sources. But Quast walks through a scenario for narrowing the causes of a big move in your stock, mostly by elimination, and offers good examples of factors to consider. And he says something important about the role of the IR function:

If your stock suffers declines and your bosses and Board members are pacing outside your office, educate them. Explain that investment drives price but a third of the time, with speculators chasing rainbows and portfolio managers modulating risk, behind the balance.

Here’s the clincher: that means two-thirds of the time, it’s somebody else’s fault. … If you have the power to show execs that selling decisions aren’t about you but are due to portfolio risks, well, that’s valuable. And when you use it to set internal expectations and measure external outreach, it is power indeed.

So IR can be more than cultivating relationships, answering phones, going on road shows – not to minimize these core activities. IR can be the place where people come for knowledge of the markets and understanding of your company’s stock.