The logical answer is “stocks go up and down.” Let’s get more specific. Among the 20 largest asset managers at the end of 2009, ten were bank-owned, says consulting firm Towers Watson. The five largest – Blackrock, State Street, Allianz, Fidelity and Vanguard – are independents that pass the preponderance of their buying and selling through the biggest sellside firms on passive equity and ETF trading programs.

The banks behind ten of the twenty largest asset managers include BNP Paribas, Deutsche Bank, JP Morgan, BNY Mellon, Credit Agricole, UBS, Goldman Sachs, HSBC and Bank of America.

The top ten futures brokers for 2009 were Newedge (Societe General/Credit Agricole joint venture), Goldman Sachs, JP Morgan, Deutsche Bank, Citigroup, UBS, BofA, MF Global, Morgan Stanley and Barclays.

The five largest banks behind derivatives contracts, according to the US Treasury are JP Morgan, BofA, Citigroup, Goldman Sachs and HSBC and the top 30 banks control nearly 100% of this business.

The top prime brokers offering value-added trade-execution services to investment managers in 2010, according to Global Custodian, were Credit Suisse, Deutsche Bank, Morgan Stanley, Goldman Sachs, JP Morgan, BofA Merrill, Newedge, UBS, Citi and Barclays.

The twenty-odd primary dealers for the Federal Reserve’s security auctions include most of the banks mentioned here, from BNP Paribas, to MF Global (formerly hedge fund giant Man Financial), to UBS.

Tracking trading, we have observed big gains in equity program volumes for BNP Paribas, Newedge and Credit Agricole. Barclays, Goldman Sachs, Morgan Stanley and Credit Suisse dominate still.

Do you see the pattern? The same banks that manage risk also drive trade executions. The ones that underwrite futures and options also help money shift from equities to futures and options. The ones managing the movement of government money are behind program trading in equities.

And the rules, from how trades match, to order-types, to best execution, to order-routing practices, are uniformly decreed by the SEC. Risk-management requirements are so steep that just big banks qualify to handle massive globally sloshing cash.

Thus, the answer to our opening question is this: When investors buy and sell, their liquidity becomes a tool for trading tactics that may be the exact opposite of what the investors actually think about your shares. Liquidity flows to prime brokers in fragments that congregate into tributaries forming a mighty stream that meets execution requirements and fuels index arbitrage or relieves counterparty risk.

But it’s not fundamental. It’s a device controlled by the few who transfer risk from asset class to asset class.

As you head out this autumn fulfilling the IR tradition of traipsing to sellside conferences, don’t forget the small brokers, the boutiques. Maybe they will buck this monochromatic crowd.

Yet often, boutiques can’t execute trades for investors who buy and sell stock on merits. They may be unable to meet SEC best-execution requirements. So they route to Morgan Stanley, which rolls orders into programs to earn rebates from exchanges, while simultaneously fostering index-arbitrage schemes with algorithms for top clients.

If this bugs you, IR pros, read everything you can about how trading works now. Then tell your management. It’s a place where IR can shine. The rub inescapably rests with the well-intentioned but unfortunate rules that cause all the money to work the same and look the same and flow to the gigantic few.

To borrow the title of a Bob Saget HBO comedy special, “That ain’t right.” And it can change.

What doesn’t make sense is a sentence from the Fed Open Market Committee minutes  from November 4, out today. IR professionals and execs, this is crucial, so stay with us here. It gets to the meaning of “money” and why we have a serious problem, despite markets up 23% since November 24, 2008, and 60% since March. The Fed said: “The low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010.”

How does the absence of resource utilization cause prices to go down? Prices decline when production is high, resulting in more goods being chased by the same dollars. And for that matter, why does the Federal Reserve keep interest rates low? In free markets, low interest rates mean that investment capital is plentiful and entrepreneurs should take chances. But if we’re saving no money, unemployment is over 10%, and profits are up almost entirely on cost-cutting…where is this widely available capital coming from?

Enter the prime brokers. All are now regulated as commercial banks by the Federal Reserve. This means they can create money under “fractional reserve” rules. Banks must keep a certain amount of assets to lend money. Most people think that means they keep back 10% of their assets and lend out the rest. In fact it means that if they’ve got $1,000 of assets in savings accounts, the Federal Reserve writes onto their asset ledger $12,000, for lending. That $12,000 did not come from productive investment activity. It came from thin air.

The Fed calls this “keeping interest rates low.” But it’s really the provision of synthetic money. This is what happened with the housing bubble. Interest rates were low. Banks like BofA had money created by the Federal Reserve on their books. That was free, riskless money. Any use of it produced returns, so they gave it out by the armload for mortgages and lines of credit – exactly as the Fed intended. Then other banks packaged these debt instruments into securities that could sit on, say, JP Morgan’s balance sheet to serve as that 8% reserve requirement, giving JP Morgan the ability to create Fed money on its ledgers and lend it out too.

Fake money was chasing fake money. When one mortgage in one collateralized debt obligation came apart, the whole house of synthetic cards came down. This was our first Madoff Moment – the veneer of prosperity peeled back to reveal nothing underneath.

We have another much bigger such veneer now in equity markets. Little new capital from investment is behind market appreciation of 23% year-on-year and 60% year-to-date. It’s Federal Reserve currency deployed by Prime brokers. It is synthetic money.

This is what we mean. This is why we continue to clang the claxon. This is why executives and IR professionals need to take a personal interest in the actions of the Federal Reserve and the government. They are behaving exactly the opposite of free markets, telling everyone that capital is widely available when it is not, and providing explanations that defy basic rules of economics.

It’s inflating equities and threatening us with another huge bubble. Mark our words: this bubble will pop. And we dance around as though the world has been healed.

And with that happy thought – hey, these machinations need to STOP if we’re ever to restore lasting value to our capital markets – it’s a grand and glorious day in Denver, and we are glad to live in a country where we can still petition our government for redress of these ridiculous grievances that ought not be happening in the land of the free.