We were sitting on the porch in the shadow of the American flag Sunday September 11 when fighter jets streaked and thundered so low that all of Denver shook. We caught glimpses of pairs of F-15s and F-16s, afterburners hot. Later, we read that warplanes from Denver escorted two flights with suspicious passengers aboard. But the ten-year memorial passed in peace.

Speaking of thunderous roar, I attended the jam-packed NIRI Rocky Mountain Chapter’s kickoff session today. Nasdaq chief economist Frank Hatheway offered a thoughtful and statistical look at the market. He joked that when he first prepared slides two weeks ago, the trends were improving but he’d had to change his comments to reflect reality.

Dr. Hatheway launched his talk by comparing stock indices with VIX volatility, Treasury yields, oil prices and gold. He observed that investor-relations professionals today need to develop a level of understanding of these “macro factors” – benchmarks of group behavior across asset classes (clients, we include a Macro Factors segment on page two of your Market Structure Report). Continue reading →

Your shares compete for attention with a dizzying array of choices in securities markets. Money chases what the market gives today. VZZB is the sort of example you can’t make up.

It’s the trading symbol for the iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN. We saw the circular from Direct Edge, where it began trading today. It’s not some cheese ball confection lofted by off-shore subsidiaries of Boca Raton broker-dealers. It was created by Standard & Poor’s. It’s underwritten by Barclays.

VZZB is an exchange-traded note (ETN), an uncollateralized debt obligation backed by Barclays that trades like a stock, leverages returns, depends on volatility and consists of futures contracts that mimic the supposed future volatility of an index. For gains.

Why should you care, sitting there in the IR chair? Eight of ten days, your stock is moving because somebodies speculated on the divergence of this versus that, or some other bodies tweaked their risk-management schemes to offset increasing implied volatility. Or whatever. It’s all interrelated. If you want to know why your stock behaves the way it does, you must see it in context of how markets work and what behaviors drive supply or demand in your shares. Continue reading →

Would you shrink your share base by 90%? What if it cleared noise out of your trading?

NOTE: See the update on the Issuer Data Initiative at bottom.

Citigroup, market cap $129 billion, plans to trim its 29 billion shares with a 1-for-10 reverse split. Citi float mushroomed from 5.5 billion shares when the U.S. government injected cash through warrants that converted to shares, which the Treasury then unloaded through Morgan Stanley while the Fed quantitatively eased the markets to solid gains.

Resisting the gravitational pull to ask rhetorically why government has power to print monopoly money, pump up its own outcomes, and put paper into one bank but not another, let’s make this Part Two of “lessons in liquidity.”

Last week we discussed the very antimatter to Citigroup, Berkshire Hathaway. BRK.A trades about 500 shares per day, mostly on the NYSE, without high-frequency trading (HFT), for about $127,000 each. There are 1.6 million shares out. Its beta coefficient, a measure of volatility, is lower than every Dow Jones Industrial component save Wal-Mart. Continue reading →

REMINDERS: We’ll be bivouacked for NIRI National in booth 321 on the exhibit floor at the Manchester Grand Hyatt in San Diego next week. Stop by! Also, clients, come see us for Happy Hour on Sunday at Busters Beach House. We’ll kick things off.

Speaking of conversations best had around adult beverages, no doubt many of you have laid awake nights wondering, “How does relative value arbitrage work, and should I care?”

Continue reading →

In Denver we get sun, rain, snow, sleet, hail. And then comes the next day. Today, a clear, bright and breezy 75 degrees Fahrenheit, photographers out snapping chamber of commerce pictures, the power goes out. It’s put us behind schedule.

Speaking of power outages, starting April 22 equity markets developed voltage problems. IR professionals, we’ve got two words for when you meet the CFO in the hallway and she asks, “What’s up with the stock market?”

Risk Management. What two words did you think we were going to offer? “Risk Management” is why the same stocks that were up yesterday can be down today. We saw surging European and Asian inflows April 22, and a reversal of the same inflows on April 27.

From the IR chair, it’s flummoxing. Your nearest peer, in the same industry, about the same market cap, doing similar things, reports results on April 22 and beats expectations and soars 10% in a day. You then report the same good results almost pound-for-pound, a handy beat. And your stock declines three percent.

What gives?

Time for those two words: “Risk Management.” Large portfolio trading schemes such as pension and investment funds may hold an array of securities. Let’s say euro-zone bonds, currency futures, US Treasuries and US growth stocks. Suppose these investments are protected with risk metrics software from SAS, and trading-desk level systems from prime brokers JP Morgan and Deutsche Bank. These systems are designed to monitor and maintain portfolio risk and return within certain parameters.

Greece’s bailout is approved. The systems determine that this will strengthen the US dollar, thus weakening inflows to US equities from European and Asian sources. The systems themselves execute automated trades, complete with offsetting derivatives, to control risk.

This behavior causes a domino effect. The same securities the system said to buy last week are now the ones it sells. That triggers other limit orders and stop-losses, changes the nature and size of passive market-making trades, and attracts statistical arbitragers finding fleeting imbalances. And because ONE variable in the overall risk-management schematic is different – maybe a risk metric is the ratio of dollars on reserve at the European Central Bank, which has just returned a bundle of them to the US Federal Reserve – it over-corrects.

The next day, the system tries to rebalance the overcorrection, producing a spike in US securities again. Commentators bray about renewed enthusiasm for US economic growth, which in fact plays almost no role. Leveraged ETFs had just today adapted to yesterday’s big risk-management change. Now those are out of balance.

Suddenly, inefficiencies abound. Passive market-making systems aren’t getting liquidity to the right spots fast enough. Stat arbs are executing simultaneous offsetting trades in ten different market centers, creating the illusion of movement where none exists.

And the next day, the risk-management system tries to rebalance again.

This is how you get great volatility in markets designed to function smoothly and efficiently.

You don’t need to explain it in detail to your CFO. But you should be able to say, “We have integrated global markets. Our results, which were great for our active investors, now are secondary to global risk management. That’s the reason we’re under pressure. It’s a portfolio problem.”

But portfolio problems are our problems too. What’s the answer? We invite your suggestions. Meantime, be sure management doesn’t take it personally. It’s not always about you.