And with good reason. The lovely KQ and I winged southward with fellow wayfarers for time over the keel on the cayes and reefs of Belize. At Queens Cayes east off Placencia past the wildlife preserve at Laughing Bird Caye, we found what one friend called “your own Corona commercial.” As the sun faded toward dusk there, we caught this grand view of our boats on Dec 11. Our companions below the surface included this delightful fellow, a spotted eagle ray. The Eagle Ray Club is a good name for a rock band.

Inland on the far side of our trip we trekked the jungle and climbed this spectacular Mayan temple at Lamanai in the Orange Walk district. Lamanai, with some 32,000 structures hidden by the jungle, once was home to 60,000 Mayans. If the world ends next December (this comic strip offers an alternative view), we’ve redeemed the time between the best we could.

Speaking of speaking, the SEC in latter December told the Nasdaq no-way on its Market Quality Program proposal that would have authorized the exchange to charge small-cap stocks an additional $50,000-$100,000 annually to incentivize broker dealers to make markets. Read the proposal here (we say “read” loosely, as it’s composed in “marketstructureeze,” intelligible if you have a decryption tool akin to what the Allies in World War II used to debunk the German cipher machines called Enigmas).

The Nasdaq, NYSE, BATS and Direct Edge (as well as other exchange operators) file many rule-making proposals each year. These rules affect how your stock trades and often incentivize the very things making markets loathsome to real investors: statistical arbitrage and high-frequency trading. Why? These behaviors are essential to exchange profits. Thus, in 2011 alone, the Nasdaq, curator of the most codicil constipation, filed at least 171 rule proposals. The NYSE made 73 proposals, and BATS and Direct Edge 51 and 42, respectively.

SEC regulations require comment periods for each proposal. We weigh in when a rule strikes us as unhelpful to public companies. We cannot recall ever reading a single comment letter from a public company on any rule filing. Why? Good question. Public companies should be a key voice in the markets where their shares trade. Instead, listed companies have seemingly handed the hen house to the coyotes.

How about a New Year’s Resolution, IR pros? Resolve this year (this week?) to involve your General Counsel in watching the rule filings from your listing exchange.

Heck, do it yourself. Fast-trading is a by-product of exchange trading incentives. Nobody drives these more than statistical arbitragers and high-frequency traders from both sellside and buyside. As in any loyalty program, exchanges give their best customers the most attractive trading rates. But their best customers are often your worst enemies – in terms of setting real, natural prices.

It continues because thou protesteth too little. Read and comment on rule proposals from the NYSE, Nasdaq and BATS at the links below. You can view other comment letters to see the best way to opine, but it’s straightforward. Write a letter explaining your objection, emphasizing your standing as a publicly traded company listed by the exchange:

http://www.sec.gov/rules/sro/nasdaq.shtml

http://www.sec.gov/rules/sro/nyse.shtml

Exchanges’ sites:

http://www.nyse.com/nysenotices/nyse/rule-filings/list?year=2011

http://nasdaq.cchwallstreet.com/filings/

Let’s make 2012 The Year That Public Companies Spoke Up.

Oscar Wilde said that illusion is the first of all pleasures. Of course he also wrote that anyone who lives within his means suffers from a lack of imagination.

Buttressed on either side with those brackets about illusion and means, let’s look today at what’s afflicting our market and why some institutions like transient trading when others don’t.

Vanguard, an institutional investor focused on passively managed funds, supports high-frequency trading. George Sauter, CIO for the Vanguard Group, wrote in the firm’s comment letter to the SEC on market structure that high-frequency volumes reduce trading costs through competition and tighter spreads. He quantifies the benefit to investors at roughly 10% over a decade. A passive fund providing 9% returns per annum would deliver only 8% returns without HFT.

By contrast, Mason Hawkins, founder of Southeastern Asset Management, which runs active investments for subsidiary Longleaf Partners, commented to the SEC on April 28 that intermediation by short-term traders costs long-term investors $20 billion per year, distorts true prices, crowds growth and value capital out, and delivers no social purpose or benefit, like investment capital.

How can two marquee institutions arrive at such dissonant conclusions? Different purposes and time horizons – a crucial element of understanding market structure. These are our views now, not Vanguard’s or Southeastern’s. Vanguard rebalances assets constantly as redemptions and inflows wax and wane, benchmark indices reconstitute – as occurred both June 18 and June 25 – and assets are allocated. Regardless of purpose, these monies follow risk-management tenets, and algorithms work like a blender, combining many different ingredients into a smooth batter.

The maker-taker model of markets today, where the consumption and production of liquidity describes market function and architecture, is ideally suited to Vanguard. It works well for general, standard-deviation, risk-management. We could go on at great length here. You’ll be glad to know that we won’t.

Southeastern Management, on the other hand, is seeking intrinsic investment value. This time horizon and purpose faces execution disadvantages now because the aim of the money is fairly singular. Constant high-speed re-pricing of securities doesn’t meet its needs.

We’re talking strictly about market function, not what theses prosper. But think about it from an IR perspective. Which investor is going to entertain your management team? So which sort of execution should concern you?

Which leads to our concluding point, for which we owe thanks to alert reader Leen Simonet at Coherent, Inc. On June 18, 2010, S&P indices rebalanced for the quarter. On June 25, Russell indexes reset for the year. Leen noted that these events lent themselves to strange market-structure conditions. We saw it in the data – massive leverage. We could only conclude that money made bets on divergences between components and on the supply and demand of shares that might arise as a result. We think swaps – market positions in off- market contracts, not open-market transactions – were huge. We saw tremendous cash trading at options desks.

These are speculative tactics, not investment purposes. They resulted in significant losses of market capitalization for issuers. On the whole, markets – we had warned that this might well occur with expirations – experienced a big shift in dollars from equities to derivatives.

The money behind it isn’t concerned with prudence, such as living within one’s means. It’s all about the gaps. Maybe Oscar Wilde would approve. But he would probably say it lacks imagination.

Speaking of scary, for those keeping record we note more currency-driven events to explain to your executives. First, the European Central Bank last week threw down the red carpet for Greek lenders, so the dollar dived and stocks soared on changes to perceived risk and anticipated further global currency-printing. On Halloween, Japan intervened to weaken the yen by buying other currencies, so the dollar strengthened (less supply, same demand) and markets plunged. On Nov 1, fear of setbacks on the Greece deal drove risk managers back to the dollar, pushing it up and stocks down more.

US markets should be proxies for fundamental value and forward multiples of collective corporate cash flows. Not meters for currency fluctuations. Happy Halloween.

Speaking of meters, there is Tom Peterffy, immigrant, billionaire, and architect of automated trading. Peterffy ranked 236th on Forbes’ list of the 400 richest in 2009, fruits of long labor revolutionizing how stocks trade. Peterffy, founder of Timber Hill and Interactive Brokers, pioneers in automated multi-asset-class electronic trading, believes automated trading goes too far.

Peterffy told Wall Street Journal reporter Scott Patterson in an October 20 story that automated trading has made markets less efficient and less safe. That’s akin to the inventor of a major heart medication pronouncing the compound dangerous to one’s heart.

Peterffy led the charge a decade ago to bring mathematics and machines to the process of matching trades. If investors needed to buy and sell shares, computers that picked and plucked from all over to fill orders for spreads at fractions of the old levels meant something was always on the other side of the trade. Liquid markets.

But they’re not liquid. They just have lots of volume. Liquidity suggests substance. And there’s the problem for the IR chair. Each market day now is a microcosm, an entire trading universe, the whole life cycle of industries boiled down to a single day’s activity. You make investments, hedge them, leverage them and trade the ramifications for currencies and bonds of growth and contraction. For a day. Start fresh the next day.

In this world, companies should hold four conference calls daily to update investors. Well, that’s absurd. It’s confusing busy with productive, exactly what low-spread markets do. The essence of human commercial interaction should not come down by regulatory edict to the spread on a trade.

See you Thursday at the NYSE for the IR Magazine Think Tank! Catch me at a table and we’ll kick this idea of one-day markets around.

This is how Pipeline Trading describes its predictive analytics for helping buyside customers identify large-block trading opportunities.

For those of you who missed the news that rocked The Street this week, Pipeline, a dark pool, was fined $1 million by the SEC for misleading clients about the nature of its liquidity.

Were you harmed? Check to see if your shares trade at Pipeli—

Oh. You can’t. It’s a dark pool. You don’t know if your shares trade there unless Pipeline’s orders route to your listing exchange.

Of Pipeline, SEC Enforcement Director Robert Khuzami said in a statement: “Investors are entitled to accurate information as to how their trades are executed.”

Pipeline offers a platform where institutional customers like mutual funds can find “natural liquidity,” or real orders from other buysiders. What’s more, Pipeline provides execution algorithms that mimic how high-frequency traders try to project price and volume in order to place profitable trades ahead of moves. If the buyside can beat HFT at its own game, then instead of being victimized, it can also generate alpha – market-beating returns on trades.

In a dark pool, you’ll recall, there are no displayed prices. You don’t walk in looking to see what lettuce sells for here. You come because you want to keep secret your interest in a truckload of lettuce. Maybe Pipeline with its predictive algorithms and natural lettuce liquidity can fill your truck at a price midway between Safeway’s and Kroger’s, whose prices will still set yours but without your walking into either store and creating a run on lettuce.

Turns out, Pipeline was filling nearly 80% of orders with its proprietary trading subsidiary, Milstream Strategy Group. Which was also using Pipeline OODA analytics to front-run orders at other markets.

Yup. That’s bad. By the way, Pipeline matches about seven million shares of about seven billion daily at present across all US equity venues. Drop in the bucket. But it earned a big fine.

Because accurate information matters.

Two takeaways for the IR chair. First, the line between what Pipeline did and what the big listing exchanges do is fine and gray, frankly.

Exchanges sell circuits and colocation services that give good customers fractionally better information, the same as predictive analytics. See our piece some weeks back about Burstream.

Further, exchanges present themselves to their public-company customers as impartial venues with displayed prices. But they pay around fifteen cents per hundred shares for DARK liquidity. Exchanges, which vilify dark pools for distorting price-discovery, incentivize dark orders with rebates and encourage it with order types.

In fact, liquidity often advertised to you as proof that your listing exchange is doing you service is paid to be there. Well, isn’t that what Pipeline was in form and function doing? Those brokers the Nasdaq lists as liquidity providers? Lots of that is incentivized order flow that earned thirty cents per hundred shares. Incentivized volume is not investment; it’s fleeting, artificial. It’s hoping to profit from the act of intermediation.

And why do exchanges pay for that? Because the act of intermediation generates data, the revenues from which are shared by exchanges under the SEC’s quote and tape plans. What drives data? High-speed trading. Who consumes data? High-speed traders. What is the majority of your volume? Do the math.

Do they tell you? You’re a customer entitled to accurate information about how your shares trade. I don’t mean to criticize our friends at the exchanges. But has the exchange ever explained to you precisely how they match trades in your shares?

Which brings us to Key IR Takeaway Number Two: If investors deserve accurate information about how trades are executed, on pain of fines, what about public companies?

In the past ten years, all the exchanges have become for-profit entities. Regulators have instituted a vast host of rules fragmenting markets and fundamentally restructuring how trades are intermediated, matched, monetized and compensated.

Do you know what changes have been made to data for public companies during that time? Exactly NONE.

This is why you know less about your trading activity than any generation of IROs. Permit me to be blunt: Regulators have not considered public companies worth the time to modernize data rules to reflect the market structure they fostered.

A year ago we thought it would take an act of Congress to redress this inequity. We now know that FINRA can fix it with a rule-filing.

All it takes is some of your CEOs asking FINRA: Why are investors entitled to accurate information, but public companies are not?

Editorial Note: Don’t miss the IR Magazine Think Tank next week in NYC.  Hope to see you there!

That seems the attitude about market gyrations in August. Prices recovered. Heck, we should’ve skipped the mess and stayed on the Cape.

Across our client base, we saw few rational-price changes between Aug 1 and Aug 12. Rational investors were not responsible aside from stop losses triggering reactions. Trading data do indicate sizeable shifts in assets by global risk managers.

We talked about that last week. Responses to currency fluctuations. Institutions transferring risk by moving money continuously via electronic markets from bonds, to equities, to derivatives, to currencies. With fear of a currency meltdown rising, risk managers engaged in random, computerized, global buying and selling to discourage everyone from running to the same side of the boat and capsizing it.

We’re convinced that techniques developed after 2008 were employed to blunt this “tail risk” crowd behavior. That’s the chance that everybody does the same thing at the same time, destroying global portfolios in a mad rush. Computers randomly bought and sold. The lack of a trend reduced the risk of a rout.

By the way, we’re sponsoring IR Magazine’s November Think Tank in New York. Our segment is on Tracking Trading: Separating the Signal from the Noise. Joining me on the panel is Joe Saluzzi of 60 Minutes “High Frequency Trading” fame. Don’t miss it.

Here’s what I want you to ponder, IR folks. One major client averaged 377,000 trades daily and nearly $2.4 billion in dollar-volume each day, more than double norms. Who made that extra $1 billion daily? Where did it come from?

That’s  one example. We saw high-frequency percentages over 71% (and as low as 56%) in our mega-cap clients last week, but HFT percentages were high everywhere, even for the smallest clients.

As we’re fond of saying, markets tromp about today in two shoes. One, the asset; the other, the hedge. So if currency fluctuations prompted the move, and HFT soared, is the second shoe effectively a way for central banks to bleed excess cash off the stagnant global table via high-frequency trading?

The biggest HFT firms were active, to be sure. Hudson River, Sun Trading, Two Sigma, Quantlabs, Getco, RGM, Tradebot. But so were the biggest global broker-dealers and program traders including Barclays, Deutsche Bank, Goldman Sachs, Morgan Stanley, BofA Merrill Lynch, Citi, Credit Suisse, Latour Trading.

The two groups were virtually indistinguishable in their behaviors. They were both engaged in HFT. Did central banks transfer billions of dollars out of circulation through broker-dealers and HFT?

We track data and correlate our conclusions to known, identifiable metrics. And we’re just sayin’.

Debt chaos, sour economic data, sure. We’re not market prognosticators, we track behavioral data. Under the skin of the news at market level, institutions shifted to managing portfolio risk about July 21. These events were observable. Algorithmic execution changed, and we saw what started it and what followed.

Large diversified asset managers swapped out of equities. That means they assigned the risk in portfolios to others through agreements that traded risk for safety at a cost. Why not just say “investors sold to manage risk”? It’s not accurate and it won’t be reflected in settlement data.

Of course, hedging produces a range of consequences too. Those underwriting hedges themselves hedge the risk they assume. That prompts speculating in whatever instruments are being used to hedge the hedges. The idea is to offset every point of exposure – like double-entry accounting, a credit for every debit.

Consider the Treasurys market – the one in peril till today. Primary dealers ranging from Banc of America to Goldman Sachs make markets in Treasurys. Average daily trading volume in Treasurys is more than $500 billion. Bond trading in total in the US averages more than $950 billion daily and nearly 80% is government securities.

There is searing growth in Treasury futures and options trading, which increased by 48% in the March quarter at the Chicago Mercantile Exchange. The daily currency trading market averages nearly $4 trillion in notional value. The same firms that dominate equity program trading and the Treasury market – the biggest bulge-bracket firms – are kingpins in currency trading.

GETCO, which stands for Global Electronic Trading CO., says it focuses on “helping investors efficiently transfer risk.” GETCO is both a designated market maker on the NYSE floor and a global proprietary trader in multiple asset classes. GETCO is an example of the role intermediaries play now, whether liquidity providers or market makers. They move money fluidly from place to place so debits and credits offset in large institutional accounts, and risk diminishes.

This is what institutions were doing starting July 21. The effects of hedges to manage risk, and hedges to manage hedges, and speculation between, is now afflicting US equities. Daily dollar volume in US equities is about $100 billion, a fraction of some other asset classes. Reweighting portfolios to reduce risk by moving from assets to derivatives has a big effect on market value.

Which brings us to large traders like GETCO. The SEC issued Rule 13-h1 requiring large traders – those trading more than $20 million daily or $200 million monthly in NMS equities – to register. There is a fear that these large traders are culpable for market risk.

Yet large traders exist principally because SEC rules fragmented markets and turned them into automated, high-speed risk-transfer devices rather than places where capital is formed. The construct hinges on liquidity from large traders. And the SEC is now penalizing those participants, whose presence they encouraged.

And what about trading in currencies? Bonds? Treasurys? How about grey-market securities where NMS rules don’t apply? Imposing restrictions in one class without doing so in another will produce migration and regulatory arbitrage. And what’s to stop large traders from fragmenting operations into units that trade less than $19 million daily?

The rule is 179 pages long. There are exemptions. The SEC admits it lacks jurisdiction over certain foreign large traders whose countries’ laws prohibit disclosures the SEC seeks. They can apply for an exemption. In effect, the SEC will demand more disclosure from traders in the land of the free where privacy is sacrosanct than what many foreign jurisdictions allow. Take Brazil’s Latour – now #6 among program traders.

While not the intent, the effect may be that US firms are disadvantaged in their own markets by rules that don’t apply to international traders. What’s more, only firms that exercise discretion over funds can qualify as large traders. Large traders might contract with agency brokers and lease their algorithms to skirt the rule.

Rule of thumb: If your rule does not apply to everyone, scrap the rule.

And we will have accomplished exactly jack-zero in preventing nefarious behavior. We’ll have driven more competition from markets, created greater cross-asset-class risk, and stultified and constipated markets where rules are supposed to avoid impeding free function. And worst, we will have exacerbated the confusion, complexity and inconsistency crippling our capital markets.

We don’t embrace high-frequency trading. But another 179-page rule is no solution, and no help to public companies. The path to freedom and health is simple: junk the rule-structure that favors high-speed arbitrage. Reg NMS. We don’t need a national market system. Money could not arbitrage prices in multiple markets if the SEC didn’t demand that all the markets display their prices. I’ll be blunt: it’s crazy.

Imagine how markets would thrive if we blitzed this convoluted mess and started over with basic rules that everybody regardless of size or speed could follow.

What if riding in the sun means peddling across Death Valley in the summer, while the rain is a passing shower in the Italian Dolomites?

Context is essential. Let’s apply the same thinking to decisions about stock-repurchases and dividends. Conventional wisdom has long held that both actions appeal to the kinds of stock buyers who hold securities and count on fundamentals.

No argument there. But ponder the third dimension in the IR chair. The first dimension is your story – what defines and differentiates your investment thesis. The second is targeting the kind of money that likes your story. The third dimension is the state of your equity store.

Your equity is a product, competing with other products, with unique supply and demand constraints. If you suppose that your story is correct for a particular buyer without considering whether the buyer can act on interest in your story, you’re leaving money on the table. So to speak.

For instance, if I want four Keith Urban tickets at Pepsi Center in October for no more than $50 each, I’m already sold on the investment thesis – “Keith Urban puts on a good show.” What if there are only two tickets available at $50? Well, I’m not the right buyer for the investment thesis, then.

Back to buybacks and dividends. Our data show that roughly 12.5% of volume on a given day is “rational,” or focused on fundamentals. The rest of the volume – nearly 90% — is either managing risk by tweaking with balances, or speculating on divergences. So if buybacks are designed to benefit money that buys and holds things of value, but that segment constitutes only 12.5% of the audience, are you matching message to audience? Context matters.

What’s more, much of the passive participation in your market depends on liquidity. Asset managers need it to control risk. Speculators – a bona fide constituency in any healthy market – game the changes in your liquidity.

Take high-frequency trading, which is both speculation and a form of risk-transfer or risk-management. It starts the day at zero, trades intraday, and ends at zero whenever possible. If you’re engaged in a buyback, often all you’ve created are magnified opportunities for short-term traders, who sell to your buyback manager’s algorithms to end the day and head home with profits, fleecing your company’s treasury. Without helping your target buyback audience.

Plus, the Federal Reserve is continuously depreciating the US dollar that denominates your earnings, which you hope to enhance by reducing outstanding shares. At best, it’s a wash. So why not cut out the middle man – all that noise in the market – and pay dividends straight to holders?

We’re not saying it’s the panacea for ages. But in the current market structure, the best thing you can do for fundamental investors is bestow cash on them. The market has sound and fury but limited rational substance.

Traders have not to my knowledge named them “Charlie Sheen.” But alert reader Walt Schuplak at the Market Intelligence Group in New York sent an item about rogue algorithms. Our friend Joe Saluzzi at Themis Trading wrote on it yesterday.

Joe explains that certain trading practices create arbitrage opportunity. Profiting from divergence isn’t bad of itself, Joe notes. But if the chance to profit is fostered where divergence could not or would not occur on its own, it raises fundamental questions.

Bloomberg writer Nina Mehta wrote today about the Australian government’s initial rejection of the Singapore Exchange’s effort to buy the Oz stock market. Singapore is a shareholder-owned exchange. The Deutsche Bourse is public. Same with the InterContinental Exchange, throwing in with the Nasdaq on a bid for the NYSE, both of which are public too. The London and Toronto markets are run by public companies. BATS may IPO.

The shares of all these firms in theory compete for investment with your shares. For exchanges, the profit and growth drivers are data and transactions. In US markets, revenue from tape data is divided up according to “quote share,” or how often an exchange is quoting at or near the best bid or offer for a security. Revenues also come from market-access fees, data products, and trades. Growth comes from propagating these drivers through more asset classes. Listing is a small piece.

Stay with me here. This is a crucial concept to grasp in the IR chair. These are your marketplaces. How much money do exchanges make if your stock trades 500 shares daily? Exchanges don’t earn commissions; they generate fractions of pennies per share.

Exchanges need companies with billions of shares outstanding. They need options and swaptions, fixed income and wholesale counterparty clearing, commodities, carbon credits, contracts for difference, futures, swaps and complex derivatives – trading at high speed ideally, with vast webs of manufactured arbitrage, all producing data and transactions.

And there’s more. The exchanges write the rules filed with the SEC that determine what transactions will take place, in what fashion, and at what cost. Do you get to script the terms for how your customers buy or sell your products and have those rules turned into regulatory mandates? Do pharmaceutical companies pen the regs governing generic drugs or the approval process?

I am not criticizing the exchanges. They are dealing with the reality handed to them.

But I hope you grasp the monument to cognitive dissonance that has been erected in the securities-exchange business today. Exchanges are counting on machines to create arbitrage opportunities that shouldn’t exist, because that’s the core growth driver. And the fees for adding and removing shares at the exchanges – the very driver behind arbitrage – are approved by regulators.

In essence, the exchanges can only thrive if everything that you hate and which scares you increases. Clearly, companies need better trading data at minimum. And an alternative exchange model.

If every public company decided that the Berkshire Hathaway model was best – a million shares outstanding, priced at $100,000 – the entire global exchange system, and all that HFT and a great portion of the webbing of derivatives totaling $500 trillion or more would be superfluous.

And…wait for it…which model typifies the Federal Reserve? Is the dollar in finite supply of great value or in a vast and churning sea of HFT?

Potent statement. I invite you to consider its ramifications some other time, however. Let’s discuss what the Flash Crash Panel’s recommendations mean to the IR chair. They will affect how your stock trades.

We read all fourteen ideas. They range from charging traders for excessively posting orders and cancelling them, to setting limits on the permitted up/down movement of stocks and imposing circuit breakers for all securities save the most thinly traded. The panel clearly aimed at addressing investor uncertainty through controlling outcomes. If stocks are constrained to ranges, and algorithms to supervision, incentives are adjusted to encourage this, and fees imposed to stop that, the net result will be less uncertainty, the panelists hope.

The net result will be a market suited only to passive index money. If that’s what you want then you’ll be happy. If you want vital markets, where investors can differentiate your shares from other stocks, then a market built around rigid conformity is not for you.

Some news reports called the panel’s recommendations bold, singling out proposals to charge high-frequency traders for excessive churn. Fine, but beware the cognitive dissonance. I don’t think enough IR professionals understand how stocks trade today. Orders run on machines that constantly track costs and risks. Most orders match up through intermediaries incentivized to show up (not actual buyers and sellers).

The SEC approved the rule-filings from the exchanges that created this “maker/taker” market and its fee structure on which HFT feeds. Essentially, the panel is proposing that they now be charged for furnishing too much liquidity. The unintended consequence of this action might be likened to airports built before security lines that suddenly have inserted into their concourses an inflexible security process.

Further, the Flash Crash Panel in making these recommendations does not really know what caused the Flash Crash. How well do corrective measures predicated on presumption usually work? Of the eight panelists, seven are academics or regulators.

The other is the erstwhile CEO of Vanguard, which favors high-frequency trading. The market’s high-speed low-spread structure is a boon to passive money that turns on constant tweaks and shuffles. It lowers commissions and creates incremental profit opportunity from discretionary liquidity, which can be run on machines to generate trading rebates. But index funds do not form capital. They index it.

How about regulators? What are they paid to do? What do you think they will recommend?

As to the professors on this panel, they are incredibly bright folks. But academics are not investors or public companies, the parties that our markets were meant to match. When I was a kid on the cattle ranch of my youth, we regularly trucked steers and culled cows to the sale yards in Weiser, Idaho. Had our beef auction market been run by regulators and academics, we would not have used it. We’d have sold cattle straight to buyers.

That’s what’s happened in equity markets, where natural liquidity is sold broker-to-broker or in dark pools. And the panel has a number of recommendations for further limiting natural liquidity from meeting up unopposed, forcing it back to the trading conformity of our artificial structure.

So the Flash Crash Panel’s recommendations will be great so long as you want most of your holders to be passive indexes and speculative arbitragers. Neither of these listens much to corporate messages. What participants thrive in a controlled, mathematical, parameter-driven environment largely devoid of human thought and intervention? Machines. What will we have more of now? Machine orders.

Lesson: Public companies ought to weigh in. I hate to be blunt, but without public companies’ voices in the decision-making process, those formulating responses to market risks are doing everything wrong.

The solution to our market woes really begins with the first statement: dollars are a depreciating asset. Then, structure must encourage vibrant nonconformity. Risk diminishes through decentralization, not concentration.

Getting back to trading, how come some investors rail at churn trading, while others love machine intermediation? Somebody must be wrong, right?

Take Templeton Global Advisors, which runs about $100 billion. The president there, Cindy Sweeting, was a fellow panelist. They favor the low-touch, low-cost structure in markets today. With fast machines taking the other side of institutional trades, funds like Templeton can re-allocate portfolios fluidly across asset classes for 60% of the commissions they used to pay, and with abundant liquidity.

What’s more, machines create value opportunities, the Templeton folks believe. The propensity of money to run in algorithmic packs today, what’s called Macro Focus investing because it’s built around big trends and large scale risk-management, means sometimes this group or that sector are left behind. Templeton can swiftly allocate resources, feed out orders through card-shuffling automated trading systems, and blend a fresh investment hand in a new suite into the deck.

Sounds great. How come everybody doesn’t agree? Mason Hawkins at Southeastern Management somewhat famously opined to the SEC that “current market structure is flawed because unfair structural advantages permit short-term professional traders to insert themselves between long-term buyers and sellers. This intermediation conservatively results in $20 billion per year in execution costs and untold billions in opportunity costs for investors.”

One says costs are lower. One says costs are higher. Our point, and we do have one, is to give IR professionals answers. So, when somebody dashes breathlessly up on the street and bleats, “High Frequency Trading is bad!” And you reply, “that’s correct,” and then you turn, and Cindy Sweeting, a very smart and informed investor and a really nice person to boot says “we love it,” well, how to avoid appearing the fool?

The answer lies in the difference between liquidity and capital formation. We have reached an odd place in the capital markets where the interests of growing businesses and the objectives of institutional investors are at odds. Intel went public in 1971 at $23.50, and raised $6.8 million. Its market cap is $120 billion today. That’s capital formation. But in 2005, its market cap was $150 billion.

This is part of the “untold billions” Mason Hawkins meant. We have traded capital formation for the efficient movement of liquidity, and the two are not equal. For many modern global institutions, finding gaps and divergences that span months and weeks, combined with cheap trades and bountiful liquidity, is sufficient.

It can and will produce returns for nimble investors. If it didn’t, we would not have seen fundamental investment fall from 50% of daily volume a half-decade ago to below 10% now, while speculation, program trading have exploded. In some mega caps now, forms of fast-moving liquidity ranging from Templeton’s comings and goings to mathematical arbitrage account 95% of volume.

But it’s not truly investment, but more like the nexus of dislocation and intermediation. Market caps for many fine companies are stuck in neutral (there are always outliers). Money hasn’t forsaken equities; it’s morphed from buying low and selling high on fundamentals, to buying low and selling high on divergence.

And that’s the difference. High-frequency trading is not bad. It’s superbly efficient for moving securities from point to divergent point. But intermediation replaces capital formation. How many IPOs have you seen raising $7 million now? It’s not done, and so companies don’t grow anymore from tiny to giant, which is not only the heart of job-creation, but the root of investment, and wealth.

So when you’re asked why some like it fast and some don’t, you might just say, “The card shuffler revolutionized card shuffling, just like fast trading did for liquidity. So how come they don’t use automatic card shufflers in the World Series of Poker?”