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.

I don’t mean gambling, but real cards. You’re engaged with some seriousness. You’re watching how you bet and when, reading the players ahead and after you.

Then The House starts doling out stacks of chips. Would you play more or less cautiously if you had free chips?

Apply this thinking to equity markets, IR folks. In trading data, we saw European money sweeping into US equities Nov 28. Why did markets trembling Nov 25 decide by the following Monday to up the ante in risk-taking? Primary dealers implementing policy for global central banks also drive most program-trading strategies.

Thus, European money surmised that central banks would intervene, and their behavior reflected it. The rest caught on, and markets soared Nov 30 on free chips from central banks. It was short-lived. By Dec 2, we saw institutions market-wide assaying portfolio risk and locking in higher derivatives insurance. The chips were gone.

Money sat back expectantly. On Dec 8, The House delivered chips as the European Central Bank lowered interest rates. That’s devaluing the euro. At first, cheapening the euro increases the value of the dollar – which lowers US stocks (a la Dec 8). But if you’d hedged with derivatives as most of the globe did, you bluffed The House. Plus, the Fed will likely have to follow Europe’s bet up with a see-and-raise to devalue the dollar back into line with the euro (expect it next week, but before options expirations).

In poker, having “the nuts” is holding the best cards, and knowing it. Central banks have given arbitragers the nuts.

Arbitrage is a buy-low/sell-high strategy that depends on gaps. Say you’re in rush-hour traffic and all the cars are packed together and then a little gap forms and somebody shifts over from another lane. That driver has just arbitraged lanes of traffic. Now suppose suddenly a new empty lane materialized?

That lane is a stack of free chips in poker, or monetary intervention. A windfall. Global statistical arbitrage is money in planetary slosh after gaps. Remember, money can trade your equity, your options and Treasury futures in one fell swoop, in seconds or less. Or any random collection of electronically tradable securities from here to Stockholm.

Gritty rational money has bought growth issues, too. If inflation in equities is likely because The House may wander through with more free chips, that’s “growth,” not value (but is inflation growth? Hm.).

Generally, arbitrage makes life difficult for thoughtful investors. Investment certainty requires a fair and simple game. You buy in, you play your best, you win or lose. No free chips from The House.

So expect arbitrage. Expect volatility.

First, these markets. Real, or more statistical arbitrage? Checking the data, something very unusual occurred last week. On November 4 in our data, the volumes we call electronic and speculative were dead, spot-on, even, at 35.8% of the total, each. That day, divergence in major market measures ceased, and volumes turned bullish. It stood out to us.

Now maybe it’s coincidence. Or it may be that risk-management systems that statistical arbitragers had rocking like a boat twice last month found harmonics. Think of a guitar string coming into tune and your music teacher nodding approval. You may think this stuff is so much financial balderdash. Well, it’s responsible for a very great portion of daily volume. So don’t brush it off like dandruff. But bottom line, money felt more confident, and it showed up on electronic platforms, not in programs. But it’s more like betting than investing.

In general, we’ve observed a return to normal market structure across the bulk of our client base. Twice in October (Oct 1-2, and October 28-30) markets were in danger of swinging wildly out of whack, but healed themselves. It’s disconcerting that it happened twice so quickly. It’s comforting that it happened. Still, market structure is in constant flux. A graph can turn positive for a few days and then develop instant weaknesses. This happens for one undeniable reason: trading is reactive, not committed. That condition remains a deep-seated threat that regulators seem not to recognize.

You might gather now that “tail risk” has something to do with hedging. Vineer Bhansali at PIMCO funds, an expert on tail risk, says it’s “risk posed by rare events.” How institutions manage for these outliers on the edges of bell curves – tail risk management – affects vast clusters of equities.

Now, stay with me, IROs. What we’re getting to here is another reason why your stock may lack staying power on good results or news, seeming instead to constantly fluctuate. Bhansali explains that traditional risk-management techniques often fail to accurately estimate the frequency and size of “left tails,” or catastrophic events. Since everybody is acutely aware of bell curves and trend following, and not wanting to be the one who lost the institutional jewels to a bad hedge, we find that trading stays in the heart of bell curves and spends less time playing around the edges of the curve where the tail can lash left suddenly and leave you in the soup line.

So part of what happens is this: your results produce an immediate stock bounce, followed by an immediate retreat, as everybody supposes their investment is in the middle of the bell curve now, and it’s time to take profits. This is a new phenomenon. It did not exist a year ago, before Lehman’s demise. And if Lehman and all the rest had in fact demised as they should have, we probably wouldn’t be experiencing this phenomenon now.

All hedging reflects value uncertainty. When it occurs every other day, the degree of uncertainty is so great as to constitute an almost complete absence of any certainty at all.

That’s meant to make you chuckle. How do we fix it? U-turn back the other direction, away from whatever we’ve been rushing at for a year, like a vortex down a drain. And by the way, this does not mean markets will falter. We can continue on for some time. But sooner or later some little tail will flick left, right in the heart of the bell curve. And no one will be expecting it.