Should public companies ask more ‘what if’ questions when it comes to stock trading?
I was recently speaking with a banker who was recounting her career development arc and described an early position as a Y2K co-ordinator. She apologized, saying the title ‘sounds silly now, but at the time it was a serious and necessary job’.
Her modesty got me thinking about both the thousands of person-years and the estimated $400+ bn that corporations, governments and individuals invested in a massive global effort to – literally – bring the digital age into the 21st century. You may recall that the focus of all that attention was the Millennium Bug, the shorthand description of the chaos considerable numbers of people thought might ensue because early computer code recorded only the last two digits of any given year – as if the 20th century would last forever! – to save precious storage and computing power.
But the complex, interconnected world of the 1990s was already experiencing errors, especially in the display of dates, and the worry was that many interconnected automated processes would collapse in unpredictable ways once the year turned to ‘00’ at the end of 1999. Some commentators imagined digital, social and economic chaos; there were even stories of survivalists stockpiling food and ammunition against the coming Armageddon.
In retrospect, with power grids still running, airlines still flying, (most) of the world well fed and babies still being born, concerns over Y2K may seem ‘silly’ now. But what was really silly at the time was how obvious the problem had been years before the run up to the date 1/1/00. The Millennium Bug was ‘a known unknown’, to borrow a phrase from former US secretary of defense Donald Rumsfeld, a gifted master of transparent obfuscation.
In the 15 years since the dawn of the new millennium, the financial markets have changed dramatically. Currently, 40-plus percent of trades on average are executed in unlit markets, and an even greater volume of trading is executed by algorithm, simply to capture pennies of price movement or rebates from exchanges. Becoming a public company used to be a marker on the evolution and growth of an enterprise. Now, for many, being a public company is little more than becoming a chip in a casino for others to trade.
Sometimes the known unknowns are just situations that challenge common sense, and if we have learned anything since Y2K, it’s that ignoring known unknowns can be costly.
Busy as they are with roadshows, conference calls, analyst presentations and questions from investors, it’s easy to see why IROs aren’t necessarily focused on arcane issues like market structure. After all, if the CEO and the board aren’t worked up about it, why should they be?
IROs and senior executives are often asked ‘what if’ questions in dialogue with investors and analysts. Usually, these questions cover familiar ground: what’s the potential impact of a competitor’s move? What does the rollout for new products look like? How will you respond to pricing moves? What’s the ramp on new customer acquisition?
Occasionally, IROs may get a question that seems to come out of the blue, probing an issue that’s had little attention or causes them to think about the business through fresh eyes, seeing both risk and possibility. It can be uncomfortable, but it’s healthy.
The pending tick size pilot study that will look at the impact of going to $0.05 trading increments for certain stocks under $5 bn market cap was recently released by the SEC. So far it has drawn only a handful of public comments, all from either market insiders or individual investors. No issuer – at least none that I can see – has offered any comments about a matter that goes to the heart of how its stock trades.
IR professionals are typically the only individuals within a public company whose job it is to think about the equity markets. It’s time public companies started asking ‘what if’ questions of market regulators and insiders.