Meeting Notes

Market Effects on Market Structure

Summary of the Presentation at the Cincinnati NIRI Chapter Meeting on March 18, 2015

Market Structure Effects on Stocks

The Cincinnati Tri-State Chapter of NIRI held its fourth meeting of the season on March 18, 2015. Tim Quast of ModernIR and Jim Byrne of NYSE discussed Market Structure Effects on Stocks. Below are several key points from the energetic presentation and related discussion.

  • Stock market history is interesting, but they’ve changed from focusing on creating markets for trading and capital formation to now lacking matching of buy/sell interests.
    • Cincinnati’s stock exchange, started in the 1850’s, is an interesting part of the history.
    • Initially meeting once/day, in the 1880’s a telephone was added . . . the daily call began.
    • It later became the first all-electronic market with no trading floor, and evolved into the National Stock Exchange with a focus on ETF’s until it shut down in 2014.
  • Stock trades are required to occur at the best national price and therefore can go to any exchange.
  • High Frequency Trading (HFT) can distort markets and stock prices.
    • Trading may occur not due to the fundamental story of a company, but due to massive volume generated by HFT, sometimes thousands of times in milliseconds.
    • Much has been learned about these distortions in the past five years or so. IRO’s can be educated by reading Flash Boys by Michael Lewis.
    • Over 40% of market volume is short (rented) and less than 20% is from active investment.
  • Investor Relations Officers need to focus on what they can control: good communication and relationships, seeking a mix of both growth and value investors.
    • Results, operations, stock indexes, fast money and macro factors can’t be controlled.
  • NYSE is working to help improve how markets work.
    • An objective is to reward real traders of stocks.
    • Having a partner with experience at the point of sale, someone “at the controls”, can help when market behavior is dysfunctional.
    • NYSE can assist with advisory services, in addition to efficient trading services.
    • Fragmentation in the marketplace can increase volatility, and more transparency is needed.

(Click here to view a slide presentation from this meeting.)