How To Monitor Stock Trading

Transcription

1 Stock Surveillance and Market Mechanics A Tactical Discussion on Understanding Daily Trading and Settlement t Activity it John Vogt, Vice President, Investor Analytics The NASDAQ OMX Group, Inc. Copyright 2008, The Nasdaq OMX Group. All rights reserved. 1

2 Topics What is stock surveillance? Objective of stock surveillance History of stock surveillance Who uses stock surveillance? How does stock surveillance support corporate IR efforts? Data sources used DTC Public Information Proprietary databases Bank and NOBO lists Tools to monitor stock trading Additional: news, research, rumors How it works Update on current market mechanics issues Copyright 2008, The Nasdaq OMX Group. All rights reserved. 2

3 What is Stock Surveillance? Identifies institutional buying and selling of a company s shares on a timely basis Utilizes a mosaic of public and private data sources and is a continuing synthesis of all available sources Provides updates on institutional changes between the required filing disclosures (13f; NQ; N-CSR, etc.) Includes daily monitoring of a company s trading, peer trading activity, news, rumor, general market activity Executed by a dedicated analyst who provides reports to the company and is engaged in an ongoing dialogue with the investor relations officer Copyright 2008, The Nasdaq OMX Group. All rights reserved. 3

4 Objectives of Stock Surveillance Efforts To continually monitor trading activity and keep the company apprised of unusual trading, peer activity, market moving developments, and news flow To provide timely, actionable intelligence about institutional buying and selling in a company s stock To advise companies on the nature of institutional activity, help qualify potential investors, and draw on experience following multiple stocks to support corporate investor relations efforts Copyright 2008, The Nasdaq OMX Group. All rights reserved. 4

5 History of Stock Surveillance Began in 1980 s in response to hostile M&A environment at the time Initially practiced by proxy advisory firms Throughout the 1990 s, became more focused on continual monitoring of shareholder base and became more of a daily tool for investor relations officers Surveillance information has become integrated into many investor relations workflow solutions Copyright 2008, The Nasdaq OMX Group. All rights reserved. 5

6 Who Uses Stock Surveillance? An estimated companies use stock surveillance for U.S.-traded issues From micro-cap companies to the largest companies Typically engaged by the investor relations officer; CFO s, corporate communications professionals and general counsel have also retained stock surveillance services 74% of IR departments subscribe to surveillance/share id services (Source: Investor Relations Roundtable research September, 2007) Copyright 2008, The Nasdaq OMX Group. All rights reserved. 6

7 How Does Stock Surveillance Support IR Efforts? Provides IRO s with timely information about activity of key target audience and their stock Helps IRO s understand which types of investors are buying and selling their stock, and whether that activity is likely to continue Becoming increasing important in light of changes to proxy rules Monitors trading and settlement activity for large accumulations Highlights movement of activist investors Allows IRO s to contact investors that are selling or buying to better understand the reasons for both decisions Helps IRO s answer questions from management and other interested parties What is going on with the stock? Copyright 2008, The Nasdaq OMX Group. All rights reserved. 7

8 Data Sources Used DTC: Depository Trust Company depository that provides settlement and information services issuers can subscribe to a weekly security position report Public information drawn from SEC filings and institutional disclosures Custodial bank and NOBO lists available information regarding the beneficial owners of stock and shares held in accounts Proprietary databases detail custodial relationships for institutionallymanaged accounts Market and trading information used to monitor trading in specific stocks, options, bonds and indices News services, research reports, various subscription services to monitor potential market moving information flow Copyright 2008, The Nasdaq OMX Group. All rights reserved. 8

9 How Surveillance Works Shares bought and sold daily analyst monitors trading activity with an emphasis on understanding institutional order flow Settlement of trades is reflected at bank and broker custodians (T+3) and aggregate totals are reflected in weekly DTC report Analyst reviews DTC reports, pattern recognition analysis applied to identify type of investor buying or selling Research of custodial relationships utilizing proprietary databases to identify likely buyers and sellers Account level information obtained where available from custodial institutions. Comparison of total number of shares held at individual account level changes often indicate buying or selling by managing institution Reference to public information and analyst s current position estimates Institutional contact Ongoing synthesis of all these sources Copyright 2008, The Nasdaq OMX Group. All rights reserved. 9

14 Common Criticisms of Stock Surveillance Accuracy Has always been intelligence rather than data Variables include shareholder base, experience of analyst, focus and methodology Does Not Identify Short Sellers Data available from custodial system does not support identification of short sellers Surveillance analyst should be able to tell you when your stock is being shorted, but not by whom Quality Varies from Firm to Firm Experience of analyst, focus, methodology are crucial variables Copyright 2008, The Nasdaq OMX Group. All rights reserved. 14

15 Stock Surveillance Supports Corporate IR Efforts Done properly, it provides an ongoing stream of actionable information about institutional buying and selling in your company s stock Dedicated analyst acts as your company s eyes and ears on the Street Helps IR officers explain to internal and external constituencies what the factors are driving stock price and volume Serves as a tripwire to accumulation of your company s stock Helps to prioritize your time and that of management colleagues Copyright 2008, The Nasdaq OMX Group. All rights reserved. 15

16 Update on Changes in Market Mechanics SEC Radar Proxy voting and access rule changes Morphable or hidden ownership Short selling High Frequency trading and flash trading debates Copyright 2008, The Nasdaq OMX Group. All rights reserved. 16

17 Morphable or Hidden Ownership Increasing use of exotic swap transactions and derivative ownership to affect voting process Hedge fund Perry Corp recently fined by SEC for its role in the aborted Mylan Labs King Pharmaceutical merger: use of swaps allowed it to influence vote without economic stake CSX case highlights hli ht the use of direct and indirect ownership in a takeover fight; British hedge funds were sharply chastised for failure to report effective 5% ownership but results allowed to stand hedge funds gained seats on CSX board Subsequent confusion over reporting requirements has led many hedge funds to report threshold (5%) positions even when some portion of that is indirect (e.g. swaps, derivatives, etc.) Copyright 2008, The Nasdaq OMX Group. All rights reserved. 17

18 Short Selling SEC amended order requiring institutional money managers to report new short sales. Data will not be revealed to the public. Order never required full disclosure of short positions but weekly initiation of short positions Hedge funds fought public disclosure on basis of intellectual property rights and potential ti for economic harm Crackdown on naked short selling: Rule 204 requires brokers to promptly purchase or borrow shares to deliver on short sales SRO s, including Nasdaq, directed to display gross short sale figures daily on websites (Nasdaqtrader.com) Further action being contemplated to slow down short selling for a stock in a downward spiral, including price or bid tests; restoration of uptick rule not ruled out but viewed as less likely; Dodd-Frank requirement to disclose short positions. ii Copyright 2008, The Nasdaq OMX Group. All rights reserved. 18

19 High Frequency Trading and Flash Trading SEC examining both practices with a particular focus on flash trading Two separate issues; both involve high transaction speeds while flash trading lets traders briefly expose orders to selected other players in the market Senator Chuck Schumer predicts a ban on flash trading; SEC Commissioner Mary Schapiro has vowed to curb any inequity in such orders as part of larger review Former SEC chair Arthur Levitt supports elimination of flash trading but not HFT High frequency trading accounts for half to two-thirds of trading volume by many estimates (Not as new a phenomenon as you might think) Some studies, including one by S3 Matching Technologies, indicate that HFT does not adversely affect retail execution Exchanges sometimes provide rebates to high frequency traders to provide liquidity. NASDAQ does not permit flash trading and believes that a review of flash trading should occur within the context of a thorough examination of lit vs. dark markets Copyright 2008, The Nasdaq OMX Group. All rights reserved. 19

20 Trends in HFT volume HFT participation in the NASDAQ exchange has been relatively stable in On volatile days retail and institutional investors tend to increase their use of marketable orders and decrease their use of limit orders because they prefer a sure execution. HFT participation can rise as automated market makers provide liquidity to the influx of retail and institutional marketable orders. 1,400 1,300 1,200 1,100 1, HFT Participation S&P % 40% 30% 20% 1,450 1,400 1,350 1,300 50% HFT 40% 30% S&P % % 1,250 10% Jul- -08 Oct- Jan- Apr- -09 Jul- -09 Oct- -09 Jan- -10 Apr- -10 Jul- -10 Oct- -10 Jan- Apr- Jul- Oct- 0% 1,200 Jan-12 Feb-12 Mar-12 Apr-12 0% Includes only NASDAQ exchange transactions Copyright 2008, The Nasdaq OMX Group. All rights reserved. 20

21 HFT activity differs across stocks, concentrating in leveraged ETFs HFT participation differs by stock. Stocks with smaller market capitalizations have less HFT participation than stocks with higher market capitalizations. ETFs and especially levered ETFs have more HFT participation than common stocks. HFT participation increased for most stocks during higher volatility in late Levered ETFs Low Market Cap High Market Cap 100% Sponsored Access 90% 80% 70% 60% 50% 40% Retail MMs and Brokerages Regional Brokerages Other 30% 20% 10% Large Banks Away Markets 0% Agency Brokerages HFT Firms Includes only NASDAQ exchange transactions Copyright 2008, The Nasdaq OMX Group. All rights reserved. 21

22 Trends in dark trading volume Ma arket Share (%) Unlike HFT, dark trading has been trending steadily upwards and is currently close to all time highs. Over the last 8 months, the percent of U.S. equities volume traded in the dark has ranged dfrom 27-34%. 2734% Dark trading volume was 27% in August, the lowest level l since July Dark ECNs, exchange like systems with multiple market participants but with restricted access and limited transparency have been the fast growing type of dark venue, currently accounting for 13% of U.S. market share Total Dark Liquidity Ma arket Share (%) Dark ECN Copyright 2008, The Nasdaq OMX Group. All rights reserved. 22

23 Trends in dark trading volume According to Rosenblatt Securities, an authority on alternative trading systems, dark pool market share fell during August, as it did during previous volatile markets, particularly May 6 th when some dark pools stopped accepting orders entirely. Volume in the NASDAQ TRF reflected this dynamic. Dark market share fell for stocks with both high and low market capitalizations. 100% 90% 80% 70% 60% Levered ETFs Low Market Cap High Market Cap 50% Other Lit 40% 30% 20% 10% 0% Retail Ping Block ECN Period 1: 4/1/2011-7/31/2011 Period 2:8/1/ /19/2011 Period 3:12/20/2011-4/23/2012 Includes only NASDAQ exchange transactions Copyright 2008, The Nasdaq OMX Group. All rights reserved. 23

24 Trends in market fragmentation Trading destinations have proliferated in the past decade. In addition to the NYSE and the NASDAQ, there are now 11 other stock exchanges and over 40 alternative trading systems (ATS) available to traders. Competition has blossomed as a result, but also introduced complexity and at times opacity into the marketplace. Venue Share of Own Listed Securities Per rcent Volume 100% 80% 60% 40% 20% 0% Lit Venues Dark Venues Copyright 2008, The Nasdaq OMX Group. All rights reserved. 24

25 Volume increases with automation As market participants of all types automated their trading, volumes have increased dramatically. NASDAQ market participants automated during the late 1990s and early 2000s. NYSE market participants i t automated t during the late 2000s. 8 Consolidated Average Daily Volume by Listings Venue 7 Billions of Shares NYSE-listed Securities 2 1 NASDAQ-listed securities 0 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Copyright 2008, The Nasdaq OMX Group. All rights reserved. 25

26 Market quality has steadily improved Competition between market centers and market makers has driven trading costs down for all investors. Automated firms are most active in the largest-cap, most actively traded stocks, where market quality is highest. Retail trading costs have declined. Institutional Trading Costs 1.4% % Nasdaq-listed % 30 NYSE-listed 08% 0.8% % % % % Source: NASDAQ OMX Economic & Statistical Research Source: Elkins/McSherry. Based on Q4 data from the Elkins/McSherry using VWAP benchmark. Beginning in 2010, E/M combined NYSE and Nasdaq trading Copyright 2008, The Nasdaq OMX Group. All rights reserved. 26

29 Suggested Readings Southern California Law Review: Vol.79, May 2006, Number 4 The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership Henry T.C. Hu & Bernard Black NB: This study was reported on in The Financial Times, October 6, 2006 by Ben White. Headlines: Concern in US over empty voting and Thesis on hedge fund tactics gives investors a shock. Ben White reported The Wall Street Journal: June 25, 2008 Vote 08: CSX vs Activists i t Alex Roth U.S. Securities and Exchange Commission: Order Amending and Extending Emergency Order Requiring Institutional Money Managers to Report New Short Sales Release No , October 2, 2008 Available at Copyright 2008, The Nasdaq OMX Group. All rights reserved. 29

30 Suggested Readings (cont d) Exchanges Should Unite to End Flash Orders editorial by Bob Greifeld, Financial Times, September 7, 2009 Don t Set Speed Limits on Trading editorial by Arthur Levitt Jr., Wall Street Journal, August 18, 2009 The Wall Street Journal : Fight Brews as Proxy-Access Nears August 26, 2009 Shareholder Communications Coalition website: Nasdaq Webinars: see for list of upcoming and archived webinar sessions that address many of these issues Copyright 2008, The Nasdaq OMX Group. All rights reserved. 30