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.

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!

Orlando sweltered like you’d expect a swamp in central Florida in June might. We heard 1,300 were on hand, up triple digits from last year. There were new faces in the crowd and new vendor names, though big ones were absent too because exhibit costs go up while things like annual reports and total public companies decline.

We were tethered to the booth mostly but I sat in on the session about how equity markets work. Rich Barry from the NYSE, John Adam of Liquidnet, and Brian King at BATS paneled, and well. Our client Moriah Shilton at Tessera moderated like a pro.

The room was packed to standing-room-only. In the two years since I sat in Moriah’s seat on the stage, how markets work and what to do about them continues to populate the thoughts of IR folks, clearly. They streamed to the mics throughout with queries.

Karen and I nudged each other and shook our heads at this one: “How can we understand where our shares trade and for what reason?”

Answers were given but ones that rambled and muddled because, in the main, there are no good answers besides ours – behavioral ones (and our effort to get better data on where trades occur and by which firms). I’m not demeaning the superlative work of the panelists either, who are bright and terrific fellows with vast knowledge.

It’s just a fact that if you don’t look at the market behaviorally – like we do – you won’t know what’s going on. We’re about the central question of the panel: Where your shares trade and for what reason.

One giant reason things are nuts out there is rules. Ever heard of the rule of Best Execution? When the SEC adopted it on January 30, 2001, it was called Rule 11ac1-5; now it’s called Rule 605. It created standards and measures of how brokers execute trades so customers could compare results and see if they were getting proper execution quality.

Of course, these are your traded shares we’re talking about. The SEC was concerned in 2001, when the Nasdaq had about 75% of its market and the NYSE over 83% in NYSE securities, that market fragmentation was depriving folks buying and selling shares of the best deal. It was because market makers were handling lots of volume, and the average public company had 13 market makers.

Stop for a moment. I just tallied the brokers, platforms, and exchanges for a mid-cap stock ($14 billion) with daily volume of 4 million shares. There were 70 different firms printing trades on June 17 at the Nasdaq. But 70% of the volume occurred at exchanges and market centers that don’t disclose the executing brokers. Doing the math, we might estimate that 230 participants were behind trades.

Realize that we’ve gone from 13 to 230 because regulators thought markets were too fragmented. Also, that it was their responsibility to do what buyers and sellers should: determine if they’re getting a good deal, just as you do every day when you buy gas, food, or toiletries (answer: you are getting hosed because the Fed keeps debasing that dollar in your pocket, so it buys less).

Rule 605 requires brokers to stay within standard deviation on trade executions – size, speed, fill rate, proximity to the best bid or offer, and other defined characteristics. These reports must be published monthly. Brokers may be fined for aberrance.

I like analogies. How did executive compensation spiral up to the heavens? Uniform behavior. Everyone complains about CEO pay, but no board wants to be out of step with the market, so pay goes up and up as do the statistics used by those who craft the pay. By contrast, Les Schwab, founder of the eponymous tire stores, earned pay of $32,000 in 2000 at a firm with $1 billion in sales then. Some store managers participating in the firm’s profit-sharing made over $200,000. It’s a private company.

The point is, the more uniform the rules, the more uniform and disconnected from reality becomes the behavior. If all trading activity must behave the same way, what happens to it? It becomes the same. We see it.

Liquidnet, the dark pool (and great friend to IR and the rational buyside) estimates in a June 14, 2011 release with trading statistics that “natural” liquidity in the markets is about 1.9 billion shares. It’s including statistics for microcaps, so if we use microcap volumes and national market volumes of about 15 billion daily shares combined, rational investment is less than 13% of the US market – about where we see it.

A big reason why is that rational money doesn’t want to follow the crowd in most cases. But try to execute trades outside the crowd, and it’s darned difficult and may even earn a fine. Liquidnet has a fraction of the market – about 1%. But a huge part of the block market – sometimes 60-70%.

See the problem? Rules force behaviors into sameness, which diminishes the participation of the money you spend all your time trying to reach.

This problem is reversible. If hundreds of CEOs or CFOs wrote letters to the SEC, say on its still pending dark-pool proposal, that read: “The markets need fewer rules and more freedom so individual thought can distinguish one stock from another,” maybe things would change.

If you’re interested in doing so, drop me a note.

Sentences like that are why alcoholism remains widespread. It’s also the reason IR folks don’t want to know how markets work. Too complicated.

Yet if we’re brutally honest, we know we should understand more. I mean, you can’t claim to be a great Yankees fan and not know the rules of baseball.

The sentence above from Nasdaq Reg NMS FAQs says: If I’ve chosen to fill my order up to the designated number of shares at a set price without leaving the Nasdaq to check for better prices elsewhere, suppose the time to complete the order is something besides “immediately or forget it.” Will that order be accepted at the Nasdaq?

This is how markets work. If you want homework, Google “Rule 611 Reg NMS.”

Buyers today are entitled by law to get the lowest price for a stock. In the 1970s, Congress got together and brooded at length about how to improve competition. As this forum of politicians deemed itself superior to thousands of years of unfettered human commercial interaction, it determined that forcing people to trade at the best price was an improvement over people figuring it out for themselves.

Before the rule was even in effect, exemptions flurried. Because obviously getting the best price begs a giant question: For What Quantity?

To address vast variances, the SEC decided on Rule 611, called the Order Protection Rule.

Remember (if you’re old enough) playing tag and getting to yell “Olly, Olly Oxen Free”?

ISOs are olly-olly-oxen-free orders. If you’ve got an ISO for 1,000 shares at the NYSE, it may only find 10 shares at the confluence of your specified price and the lowest one available. If the order is immediate or cancel (IOC), then it returns with 990 shares unfilled. If the Time in Force (TIF) is “Day,” then throughout the day the order is going to loiter at the exchange where it’s been routed, filling the rest if and when its price is hit.

But it doesn’t have to leave the NYSE for the better price at a “protected quote” elsewhere. Like other situations in which prophylactics offer a measure of security, a protected quote is one that, shall we say, comes with confidence. A protected quote is by definition immediately and automatically accessible. Therefore, no manual quote – somebody entering a trade – is protected.

Protected from what, you say? Somebody skirting it, like an ISO can. So if you want your price to be guaranteed to display, then it must be an automated order.

Do you see the problem? To comply with Reg NMS, machines and markets must automate orders. It’s the only way that they get protection. That means machines have been given an edge over humans.

At the same time, regulators have granted a bunch of exceptions to exchanges that let institutions work around those prices. What then do you suppose the displayed prices reflect?

Compliance.

Not the best value, or even the best price. Perhaps not even real intent. What happens when compliance requires that you do one thing and believe another? Deception, sleight of hand, arbitrage.

On the cattle ranch of my youth, when we brought cattle to market the auctioneer didn’t rattle off a bunch of prices to a set of shill bidders batting worthless and hollow trades back and forth while the real pricing was occurring somewhere else unknown to us and anyone else in the room.

The only thing required for a fair market is that buyers and sellers are satisfied that nobody is gaming the price they’re getting.

The equity markets today are the grand archetype of gamed prices. And that means, IR folks, that you need to do more to know the REAL price of your shares, and who’s setting price, be it investors, trend followers or arbitragers.

Further, the IR chair should be leading the campaign for issuer involvement in market rules. We’re doing our part to help with the IDI (and we’ll have an update soon – we are talking with folks at the very highest decision-making levels. But I guarantee that change will only happen if the household names trading on the Nasdaq and the NYSE demand it – so demand it!).

Oh, and the answer is: Yes. The ISO with a TIF of something other than IOC is accepted at the Nasdaq. You probably have thousands of those bouncing around in your volume, arbitraging spreads between protected quotes and undisplayed prices.

Only corporate IROs may answer. Apologies to the rest, but you’ll see why. Corporate IR pros, look up and write down your trading volume on March 4. First question: Where did your shares trade?

Second question: Which brokers executed the trades that, when added up, equaled that volume you wrote down for March 4?

Yesterday, Dow Jones reporter Jacob Bunge wrote about our drive to organize companies to petition Congress and regulators for more transparent data about their share-trading.

There’s a landing page on our website for the letter we’ve drafted. Our goal is to list 100 companies as supporters when we deliver this letter. It should be 5,500. I’ll tell you why in a moment.

Please read the letter, copy the talking points, set a meeting with your CEO, CFO and General Counsel, and explain why your company must support the initiative – which is free and requires no more work than adding your name to the list.

Why should you and 5,499 other companies support it? Permit me to be blunt. Many investor-relations professionals don’t know what they don’t know. If you knew which brokers traded your shares on what markets, you’d generally understand your share movements.

It need not be real-time. IR folks aren’t traders or investors. But 24 hours after the trading day, you should know where your shares traded and which brokers executed trades. If, for instance, the same group handles a bunch of volume during options expirations, well, that’s probably what they do.

Ten years ago, you could see a lot more. On the floor of the NYSE, specialists had 85% of the book for a given NYSE issuer. At the Nasdaq, almost all the volume could be tracked, save smatterings at ECNs. I was an IRO and downloaded my data every day.

Today, about half your volume flows invisibly into a consolidated tape. Another chunk executes or reports at other exchanges like BATS and Direct Edge. That means you see a third or so. We can apply mathematics and rules and track behaviors with stark accuracy because it’s a rules-driven marketplace. But you – there in the IR chair – are entitled to complete information. You are a member of the capital-markets community, not a side show.

It’s not the fault of listing exchanges or alternative markets. It’s how the rules work. Everybody forgot that public companies need data too, and rules left them standing by the roadside in 2001.

If companies want better data, they must ask for it. Comprehensive trading data is a baseline necessity for making informed decisions about your currency – your listed shares. It’s a fiduciary corporate responsibility to know where your shares are trading, just as the head of sales has got to know the distribution channels.

I’ll paraphrase our vice president and say it’s a big…deal. The door is wide open for public companies to enter the 21st century in our capital markets. You’ve got to walk through it.

So take my challenge. Try to figure out where our shares are trading. Then, ask your CEO and CFO to back this initiative so you all can have answers rather than questions.

Actually, OTC stands for “over the counter.” It describes brokers doing business directly with each other, and it’s a big reason why NYSE Euronext and the Deutsche Bourse (everybody spells it differently) are merging.

Our friend David Weild, former vice-chair at the Nasdaq and current market-structure expert at Grant Thornton said of the impending deal: “Scale, scale, scale.” Duncan Niederauer, expected to lead the combined entity, said today: “This is an industry that lends itself to scale.” It seems that what began here in 1792 under the Buttonwood Tree at the foot of Wall Street is at an end of sorts. Why?

Businesses need scale when markets are commoditized and currencies debased. But beyond that, it’s the result of monumental revitalization of the over-the-counter market. Big brokers are trading with each other, avoiding exchanges. And because they are experts at managing risk, institutions choose them not just for execution but as counterparties for transferring risk from asset class to asset class. This is fast becoming the main reason that natural liquidity – trading lingua franca for shares not driven by high-speed intermediaries – moves around.

Did any of you see Investment Technology Group’s 10-million-share block trade last month? ITG POSIT is one of the earliest and largest “dark pools” for matching up institutional buyers and sellers outside the noise of the market. It combines trade-execution with analytics to offer the buyside efficiencies. Yet ITG’s revenue, trading volumes, and profit are down versus 2009 because, according to ITG’s earnings release out Feb 3, 2011, “continued low levels of trading activity by domestic long-only institutional investors negatively impacted our client mix.”

ITG competes with both exchanges and big broker-dealers like Goldman Sachs and Morgan Stanley. So if ITG sees flat long-only institutional demand, and big exchanges are merging – the London Stock Exchange is also marrying the operator of the Toronto Stock Exchange – what’s going on?

Answer: big brokers are controlling the supply of securities liquidity. Here’s the irony. Regulators decided back in the 1990s that intermediaries – the network of broker-dealers comprising the National Association of Securities Dealers – were making too much money. Stock trades were decimalized. The Global Settlement of 2003 between Elliot Spitzer and major bulge-bracket firms effectively ended capital-formation predicated on valuable research. The aim: To “level the playing field.”

The result? The exact opposite. Instead of shrinking the power of intermediaries, these same brokers are now threatening the whole exchange construct.

Want more irony? Gigantic broker-dealers would have gone largely extinct in 2008. But governments, now desperately dependent on the very same brokers to make markets in government securities comprised of wasting fiat currencies, gave them free access to public purses and treasuries.

No surprise, they feasted. Thus, with the phrase “too big to fail,” government set in motion what now may transform the seminal emblem of American capitalism. There is a tangled web strangling the Buttonwood Tree.

Anyway, after sharing the Hyatt in downtown Seattle with the Kansas City Chiefs (convincing victors Sunday), we returned to Denver Monday, body-scanned once but otherwise briskly processed through airport security. So we’re a day late with The Map.

Speaking of body scans, the SEC’s current insider-trading probe is poking at the squishy Wall Street practice of rebating trading costs with “soft dollars.” We should know about soft dollars in the IR profession. Chances are, the last sizeable institutional position taken in your stock involved them.

The soft-dollar tale is twisted and winding. It’s another lesson on the foibles of policies predicated on exceptions to rules. Our story begins in 1975, when regulators and congresspersons decided that cash on the barrelhead was a quaint, anachronistic notion unfit for a society increasingly enamored with convolutions. Better if the exchange of valuable services involved paperwork, puts and takes, and accounting gimmicks.

Obtuse? Only in part. From the late 1700s, the Buttonwood Agreement governed cash on the barrelhead trading. It was two sentences long and said that brokers would trade with each other and charge the same commission. From it came the NYSE. Since commissions were fixed, brokers differentiated themselves by bundling proprietary research with trade executions. Business 101. Separate yourself from competitors on service, not price.

With the Securities Acts Amendments of 1975 came the death of fixed commissions by congressional decree. By doing so, government put the focus on price rather than service. Confusion bloomed. The SEC Act of 1934, along with the Investment Advisors Act, the Investment Company Act (both in 1940) and the Employee Retirement Income Security Act (ERISA) of 1974, all placed restrictions on using client funds for brokerage services. But with commissions and other services unbundled, how were advisors to obtain research? How were brokers to differentiate themselves on any basis but price if fiduciary duty required institutions to pay the lowest possible commission?

Ah, the unintended consequences. Congress had to amend the Exchange Act of 1934 with Exception 28(e), since one law was now contradicting three other laws. With that exception to the rule, Soft Dollars were born. This safe harbor gave institutions and brokers the ability to use client funds for other services, so long as a good-faith belief in benefit and reasonableness buttressed the decision.

Well, disputes arose. Investigations ensued. The SEC issued a series of interpretive rulings, some reversing or contradicting earlier positions. Entire businesses such as Investment Information Inc, flourished, helping brokerages and their clients manage soft dollars, only to be wiped out by revised SEC views of what constituted compliance. From 1986 to present, interpretations have pulsed, coalesced, dimmed, brightened, flashed and fluctuated. And soft dollar programs exploded after Eliot Spitzer’s 2003 settlement with the sellside deprived brokerages of the capacity to associate research and trading at all.

Here’s an irony. Heavier soft dollars come from large investors that buy and hold stock. Why? Trading costs can eat up returns. Soft dollars offset that impact. So, it’s likely that position-building by large institutions will include soft dollars.

Now the SEC believes nefarious deeds lurk in the soft-dollar cesspool. No wonder. It’s a complicated construct. It demands good faith, the sort of thing in short supply with those who want to cheat.

It also demonstrates that replacing two sentences between businesses with reams of federal registry entries is neither healthy nor expedient. And it’s what happens when buyers stop paying sellers and turn instead to byzantine intermediary rebate and allocation schemes – the same notion that underpins maker-taker trading markets, social programs, defense spending, and health care in the United States.

Hm.

Occam’s Razor. The law of economy. Simplest is best. The 14th Century Franciscan Friar Thomas of Ockham (Occam) wrote that “entities must not be multiplied beyond necessity.” Maybe we could learn from the good friar.

Soft dollars are the opposite of hard dollars. Which would we prefer?

Along with Larry Leibowitz from the NYSE and Minoj Narang of Tradeworx, 60 Minutes interviewed Joe Saluzzi from Themis Trading (read their white papers about trading). Joe was on my panel about modern trading at NIRI National in 2009. Few people are better at explaining the peccadilloes of a market structure based on price and speed.

Here again is the problem, simplified to its most basic elements: Trades must meet at the best bid or offer. The participants able to get to the price fastest will always set the price. And because the exchanges and regulators alike have embraced a “maker/taker” model in place of the old auction and automated quotation systems, transient money is always setting your price. Yes, it requires the presence of something else underneath it, as the Flash Crash illustrated. But the structure, not the behavior, is the problem. The behavior is precisely what one would expect from the existing structure.

We think the solution is elementary, and we’ll come to it shortly. IR folks, here’s where you can exercise leadership. Investor Relations generally thinks and acts as it did before the Order Handling Rules forced exchanges to display prices from other markets, and before the Spitzer Settlement turned the sellside into information technology departments for the buyside, and before Reg NMS turned everybody trading equities into speculators.

Now at least, we realize something’s awry. Investment behavior isn’t setting stock prices often. In fact, value investment behavior prices according to criteria that are diametrically opposite of price and speed. But in order to buy shares, value buyers must abandon their core investment philosophy and act like intermediaries, racing from one minute price point to the next. In a sense, they’re forced to speculate on small moves.

The general posture of investor relations and corporate communications is to avoid discussing the markets. Well, these are our markets too! The SEC Acts – flawed though they may be and needing redacting – codify capital formation as the principal purpose. The acts require fair treatment for all constituents, and that means issuers and investors too, who are unconcerned about the number of price points between the bottom and the top of the book.

I’ll give you an example. When I first sat down in the IR chair in August 2001 at Surewest Communications, its stock listed on the bulletin board traded about 1,300 times… per month. Price was about $40. Compared against financial metrics such as pretax cash flows and earnings-per-share, it was a fair valuation.

When the stock moved to the National Market System, it soared to nearly $60 per share. When Worldcom, a giant and distant peer, filed for bankruptcy protection, it retreated nearly to $20.

The point is that the national market system and its relentless appeal to speed, price and trends, did not help the investors of Surewest. In hindsight, it might have been better to trade 1,300 times per month, with a value correlated to financial performance. The company had little more in common with Worldcom than a “telecommunications” tag.

IROs, CFOs, and CEOs, now is the time to voice concern about a structure created by regulators that impedes the formation of capital and disadvantages long-term holders. If you don’t, it won’t change, because the parties making the rules benefit from the existing structure.

Which leads us to our simple solution. It’s bothersome to me that, here in the US at least, our first response to a problem is to cast about for things to prohibit. Our governmental philosophy, which we seem to ignore when problems arise, is about unimpeded life, liberty and pursuit of happiness. Do we follow the SEC acts of 1933-34? One begins by declaiming the centrality of capital formation; the other enjoins against impediments to free markets and unfair advantages for some participants at the expense of others.

And what do we have? A capital market where Mail.ru, the giant Russian impending IPO, chooses London over New York. One in which price and speed horn out every other value metric, thus ensuring that only the fastest can play well.

The solution? Remove the price controls. Machines depend on patterns. Let them trade. So long as any other value metric can also play fairly. Machines using scraps of liquidity moved at great speed cannot trump a buyer placing an order for 500,000 shares $0.25 ABOVE the last price.

An unimpeded market would bring price and value back into correlation. The marriage of speed and price would no longer be the decreed, uniform denominator of every equity trade. Beauty would be in the eye of the beholder, as it should be.

Things will change when public companies speak up. Look at Joe Saluzzi, one trader at a small firm in New Jersey. He spoke up. Ears are open. Where is our Joe Saluzzi from a public c-suite?

Carmen Barone and the Barclays team graciously hosted me yesterday on the NYSE trading floor, and in the afternoon Marge Wywras at Knight Capital Group turned me loose with the traders on the Knight floor in Jersey City. That’s darned near a perfect business day to me.In reporting back to you on findings important to the IR chair, number one, floor operations play a crucial role still. These specialists, now called Designated Market Makers, are required to support issuers by actively placing bids and offers and committing their own financial resources. By wading into the stream of liquidity, 98% of which is automated on sophisticated mathematical systems, DMMs stabilize prices and help to foster orderly markets. Traders roam the floor with handheld devices controlling a variety of algorithmic options for working orders, which they deploy based on market conditions and customer preferences. They may follow the market, aim to affect a certain percentage of volume, aggressively push for alpha, and trade on a time-weighted or volume-weighted basis.

The floor revenue model has changed. Brokers are paid by the NYSE to provide liquidity, a form of rebate trading, which we’ve written about before. Just as grocery stores give out coupons to encourage customers to shop, rebates help exchanges and market centers attract liquidity from buyers and sellers, who then generate transactional revenue and data-services fees. The NYSE is supporting the DMMs by letting them collect fees that might otherwise go to super-fast market-neutral platforms, the high-frequency traders who own nothing and risk little in order to sit between buyers and sellers and churn shares back and forth.

The NYSE is stabilizing at some 25-30% share of traded volume now, down from the 85% (in listed issues) it enjoyed before the 2006 changes, but an improvement over recent pressure. The irony is that in an era of transparency, even the floor traders don’t know a great deal about the source and nature of the volume with which they interact. But they know a whole lot more than most. Our advice to issuers: make good use of their valuable access to market information.

My good friend Marge Wyrwas offered some eye-opening peeks behind the deceptively quiet façade of the building housing Knight Capital Group’s sleek trading operations. Wow. The floor is sliced up into sections providing sales trading, listed and Nasdaq equity trading strategies, ETF execution, bond trading, currency trading and even a new carbon trading operation. Billions of shares trade here every day. The degree with which Knight can knife through the maze and craze of equity trading and manage the execution of trades is really something to see. Two key takeaways: they do more real volume and less high-frequency trading than many think. And they blend the marvel of human insights with the magic of ultra-modern algo technology.

Personally, I was pleased to see again that we’re keeping right up with what’s happening. In fact, we’re tracking and clustering executed order flow to uniquely capture the nature and origin of liquidity in way that’s not being done, even at that trading level.

Why does all this matter? The IR role is an information role. Become the expert on market structure at your company and redefine the way IR is measured. It’s valuable to your management team, and cool to boot.

The NYSE and Charles Schumer were talking today about rules for dark pools. The NYSE is partnered with dark-pool operator Liquidnet and is building a massive high-speed trading facility in New Jersey. The Nasdaq meanwhile plans to launch an exchange next year that will give priority to orders of size, to compete with the size advantage dark-pool operators offer.

What’s going on here? Politics, mostly. We’ve said plenty about this stuff. But the regulators – and IR folks too we fear – continue to misunderstand the central issue. The IR profession is about supporting capital formation and fostering productive, creative enterprises. At the rate we’re going, none of us will have jobs. If trading things is an end unto itself, why bother with all that work to start and run companies? Take your idea to a broker, have them issue an exchanged traded note representing your idea, hire an accounting firm to handle regulatory and financial reporting, and that’s all you need. Traders, have fun!

We’re being obtuse. But dark pools are like black markets. Black markets form in response to price controls. We can go back to the order-handling rule in 1996 in which the SEC set out to “create better pricing opportunity.”

Come forward to Reg NMS. It was a legitimate effort to minimize market arbitrage, but it in effect is a gigantic price control. It says that all trades (there are exceptions but stay with us here) must execute at the best national bid or offer. That’s like pouring Niagara Falls through a funnel. You have literally millions of different prices trying to match up for securities, but trades can only execute, simplistically, at that one best price. That supposes that all buyers and sellers have only one thing in mind: price. If that were the case with cars, we’d all drive Tata Nanos.

Dark pools formed to serve audiences that wanted something more than the best price at this split second in time without regard to supply. Who uses them? Mostly big institutions wanting to move sizeable amounts of shares without interference by parties with other objectives such as speculation, rebate-capture, high-frequency trading and risk-management.

What’s the response from regulators? To clamp down on dark pools.

We’re oversimplifying. And we have good friends running high-frequency trading platforms. We mean no offense to anyone. But the problem in our equity markets is that they’re efficient for parties that want the best price and which don’t want to commit capital and own things.

But they’re very inefficient for capital formation. In 1996, 675 companies IPO’d in US markets with prices over $5. In 2008, 21 such companies debuted here. Money has shifted to private equity by the trillions, and to international markets with fewer price controls.

This had better matter to us more than anyone else. This is our profession. Let’s defend it, rather than slice our collective noses off to spite our faces.