Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, February 18, 2010

“Fair” valuation? Not in these markets!

The classic definitions of investor relations all refer to the creation of a fair valuation as being a key objective of IR. There is a growing concern that the huge growth in non traditional trading venues and trading methods are not allowing proper price formation, and hence an incorrect valuation of the company’s stock. A number of important organisations are pressing for change as a result. (see below for links to their views).

When a company comes to market through an IPO, management of the company are highly focussed on helping the market understand the investment story, and winning support. The disclosures are closely coupled with the primary market share price, and the market transactions are watched like a hawk. The executive of a company take full responsibility for the share price at on IPO.

In the secondary market however, focus goes on to compliance, in the sharing of information in accordance with stock exchange or regulators rules – the so called continuing obligations. This allows ‘traders’ with no interest in the equity story to take part in the market. The share price moves up or down often based on no company sourced information, as algorithmic trading takes over responding to pre- and post-trade transparency data. In the secondary market today the executive of a company cannot and do not take full responsibility for the share price. And the volumes of transactions are very significant with at least 50% of all transactions being executed away from the traditional exchanges operating full “lit” markets.

As a result, overall market transparency is impaired as an increasing volume of trading takes place with non-displayed orders. A fall in volumes in lit venues can impair liquidity, which has an effect on the quality of price discovery, as price determination is based upon the prices discovered on the primary exchanges.

One of the problems for IRO’s is in understanding the nature of the venues, let alone the impact they can have on the share price process. Consider MTF’s (dark pools and lit), Systematic Internalisers, OTC markets reporting to the exchanges, and OTC markets reporting to Markit Boat....Its another language.

However the key point is the absence of transparency, which itself impacts price formation, and hence the company’s valuation. Is price formation a quality, reliable process based on company and economic fundamentals? If it isn’t how are genuine investors protected, and what does it say for the relationship between an issuer and investors.

And we haven’t even touched on illegal trading in a week where we have seen 2 major news items around market abuse...

So what to do? Companies have been noticeably unconcerned about this problem, however as regulators in both the US and the EU start to look at regulating these markets, issuers may well want to make their views known. Among those with information – and strong views - are: FESE, NIRI, Avenues, CFA Institute,

This is a complex subject, and there are many other aspects. But its a debate that I think companies should be engaging in.


Post a Comment

<< Home