Concannon on Stock Splits (Part 2)

Chris Concannon is CEO of Bats Global Markets. Today I will conclude analysis of his article “Stock Splits for the Middle Class,” which was recently published in Modern Trader magazine.

Concannon suggests targeting “buy and hold” investors (for which he provided no evidence) is somewhat classist:

     > While it’s nice for a company to say it
     > wants to attract long-term buy and hold
     > investors, failing to split a high-price
     > stock encourages small investors to avoid
     > a stock altogether or causes them to pay
     > a substantial penalty when they trade
     > such a security… One could argue that a
     > company’s refusal to split its stock is
     > a refusal to embrace middle class retail
     > investors with less investable wealth.

Concannon qualifies himself nicely here by saying “one could argue.” The argument would be stronger if he could provide some evidence that higher-priced stocks are eschewed by a significant number of retail investors. Maybe it doesn’t make a meaningful difference given the dominance of institutional traders but I would at least like to see some effort to offer more than empty claims, which I consider speculative and meaningless.

Concannon closes with the following:

     > When debating… the goal of making stock trade
     > better, we should also focus on… stock splits.
     > While this is self-serving to a degree, given
     > our per-share revenue model, the evidence is
     > clear that many investors would save money and
     > more investors could participate.

This, along with many ideas in the article, makes logical sense. Unfortunately many logical ideas in finance do not bear fruit. I am baffled as to why he says the evidence is clear because he provided no evidence in the article. If there is clear evidence then please show us! As written these are nothing more than hollow claims.

What is clear from this final paragraph is Concannon’s agenda, which I believe helps to categorize this article. As the CEO of a major stock exchange, his corporate revenue is proportional to share volume. I consider this article a marketing piece to encourage greater use of the stock split. I also consider this an editorial since it includes no supporting evidence. A table showing number of stock splits per year seems like a no-brainer to include. I probably walk away more skeptical since such simple data is not presented.

I believe we should always read critically for the most complete understanding. Reading critically includes understanding the writer’s agenda. Writers aim to persuade, which is in their best interest. Being persuaded is not always in the best interest of the audience, however. Critical thinking is a very useful tool to defend against being persuaded by lower-quality [sometimes false] information.

Concannon on Stock Splits (Part 1)

Chris Concannon is CEO of Bats Global Markets. He wrote an interesting article recently in Modern Trader magazine called “Stock Splits for the Middle Class.”

Concannon begins by presenting some data to suggest current stock trading is weak and depressed:

• Average share volume for the 12-month period ending April
  30, 2016, is down ~9% from the same period four years ago
• Notional volume during this period is up 15%
• Share volume in January 2016 is up 1.92% while
  notional volume is up 42% compared to January 2010

Weak/depressed trading is seen by a lack of significant share-volume growth. More notional value traded on equal or lower share volume suggests stock appreciation is outpacing stock splitting. I would have liked to see how these numbers compare to other historical periods for a stronger case, though.

Concannon believes the refusal of corporations to split stocks is one limiting factor on share volume:

     > In an ill-conceived effort to attract “long-term
     > investors” and detract “speculators” from trading
     > their stocks, a number of popular U.S. companies
     > have kept their nominal stock prices above $200,
     > $500 or even $1,000 per share.

This is an interesting claim but no evidence is given to support it. If he is referencing a conversation(s) or quote by directors or C-level execs then he should most assuredly cite them! The use of quotation marks implies credibility but a critical reader cannot assume these to be actual words spoken by others.

Concannon goes on to explain the psychological impact of higher stock prices. He begins:

     > An average individual investor may avoid a $500
     > stock as being too richly priced but change his or
     > her view when that security is split 10-for-1 and
     > then trades at $50 [emphasis mine].

This makes sense but the actual impact is unspecified and I’m not sure it could really be measured. Concannon qualifies the statement well.

He then goes on to suggest the wider bid/ask spread is a significant drawback when trading more expensive stocks. He argues stock splits, while leading to higher per-share commissions, would more than make up for this by improved liquidity. In theory this makes sense but it is just that: theory. Why not interview some big institutional traders to see if they agree? This would be compelling evidence. Without any evidence it remains an empty claim.

I will conclude with my next post.

Perspectives of a Financial Adviser (Part 5)

Today I conclude discussion of an e-mail correspondence I recently had with a financial adviser. What she said about a lack of peer-review in the industry has been quite the eye-opener for me.

     > And then, take it one step further and pretend that
     > you are not the investor, and instead are an advisor
     > for a relatively unsophisticated (in the field of
     > finance) client (or 200-300+ people as is usually
     > the case). Which would you rather be responsible for
     > advising a client to do… or, would you choose some
     > other option that you have available? Keep in mind
     > that advisors bear responsibility, not just legally,
     > but personally (emotionally) for knowing that they
     > may lose their clients’ retirement, education, or trust

Having so many clients is no excuse for using sub-optimal investment methods—methods that any individual could execute for him/herself given a healthy dose of education.

With regard to options, I have heard advisers complain about the excessive time/cost it would take to get regulatory clearance. Perhaps regulators are somewhat behind the curve but I’m not convinced. Some investment advisers do employ option strategies for their clients. Given my belief that many advisers don’t know options I wonder if those complaining have even tried? And if the compliance firm is to blame then find one that is option-friendly!

     > money. And, remember that they have to implement their
     > investment strategy for not just one or two families, but
     > hundreds. Given these conditions, do you think advisors
     > will be overly risk-averse (compared to the purely
     > logical choice they might otherwise make based on
     > economics) in their decision making? Statistical inference
     > matters less to investors/clients who have lost any
     > percentage of wealth, especially if they don’t fully
     > understand why the risks were taken/decisions made.

To me, the omission of statistical significance is like off-label drug usage. Physicians occasionally prescribe medication for reasons not mentioned in the package labeling. If this is not standard of practice and if peer-reviewed data do not support said off-label indication then the physician could be susceptible to legal action should adverse events occur.

Given that evidence-based medicine has done well to advance medical practice in this country, why aren’t financial advisers held to the same standard? Do good statistical research that can be authenticated and replicated and use those methods to manage money for the public. Without this, I struggle to view the financial industry as delivering anything more than quackery to unsuspecting retail clients.

Perspectives of a Financial Adviser (Part 4)

I feel I sometimes give financial advisers short shrift so I decided to do a blog series focusing on the words of one adviser who I respect. It hasn’t been going well.

     > My previous points about compliance and legal
     > concerns are intended to highlight the idea
     > that even if he wanted to include a statement
     > about [statistical] significance, he couldn’t
     > because it would be an overstatement of
     > confidence/create more misunderstanding
     > among relatively uneducated readers than is
     > acceptable by industry standards.

As stated previously, I believe statistical significance is necessary to evaluate the possibility of fluke occurrence. I also think this allows for apples-to-apples comparison with other statistically significant data. Since the author is the only one capable of doing the analysis, why not include a disclaimer(s) that clears the way for statistical reporting?

     > I know it’s frustrating not to be able to apply
     > experimental methods directly in this field, and

I disagree. I think it is possible to undertake the laborious task of trading system development but most advisers/traders are not educated about the methodology and/or capability of the process.

     > to some degree it is that frustration and lack of
     > predictability that compels people to work with an
     > advisor. Sometimes this is because they feel that
     > someone with more experience and education would
     > be able to take better bets than they would, but
     > sometimes it is because they want to outsource the
     > stress of the unpredictable returns. They want
     > someone to take the blame (other than themselves)
     > if their portfolio doesn’t do what they want it/expect
     > it to, which is inevitable at some point. Both of

She makes really good points here.

     > these reasons to work with an advisor are
     > legitimate, and on top of those, concerns about
     > continuity and consolidation of household wealth
     > mean that individuals rarely manage their own
     > portfolios/trusts for their entire lives. At some
     > point, they decide that someone else should be
     > the fiduciary keeper of that burden/process/role.

My dispute is with what people don’t know they don’t know. The cost to offload said burden amounts to much more than the 1% (or less) management fee because most advisers employ relatively inconsistent investment vehicles.

I will conclude with the next post.

Perspectives of a Financial Adviser (Part 3)

I have been presenting some excerpts from an e-mail correspondence I had with a financial adviser a few months ago.

She continued:

     > The status quo is to calculate the return by
     > acceptable methods… and report it “as is” for
     > investors or advisors to interpret as they see fit.

I would argue without knowledge of statistics and system development, neither investors nor advisers are in any position to interpret that return. The adviser is usually the one left to do the interpretation and I can only hope s/he has a thorough understanding of scientific methods and statistical testing like those publishing in peer-reviewed journals.

     > …I’m not suggesting that he cherry-picked returns.
     > He cited his sources in the usual way (where the raw
     > data came from, and that it was manipulated). This is
     > all that is required to be in compliance… This
     > strategy avoids the appearance of overstating the
     > performance as [statistical] significance might do for
     > readers who don’t understand the limitations of
     > [statistical] significance. It’s the job of the
     > compliance officer and the publishers of the magazine
     > to protect… from law suit[s]. “Average” is perceived
     > as a less complex and therefore less dangerous term.
     > Averages don’t assert anything, they simply get
     > reported, and readers make meaning for themselves.
     > “Significance” is a term that may implicitly overstate
     > findings to a degree that may mislead unsophisticated
     > readers, putting the writer/magazine at risk.

This was shocking to me. Advisers should not publish statistical analysis because they may overstate importance to the uneducated reader? In my opinion, statistical analysis is necessary to suggest a difference might be meaningful. And only the author can do the statistical analysis since the entire data set is rarely (if ever) presented in the article itself.

     > This fear of overstatement runs through everything
     > from professional signatures to performance reporting.
     > Implied guarantees or overstatement are very common
     > compliance concerns across the industry. It would be
     > for these reasons that I would guess Craig kept his
     > calculations so simple…

This tells me that the compliance officers give advisers (authors) carte blanche to publish anecdotal information rather than statistically tested, validated data. It’s like optionScam.com everywhere. I find this extremely disconcerting…

…but I will continue next time, nonetheless.

Perspectives of a Financial Adviser (Part 2)

I recently had an e-mail correspondence with a financial adviser about a lack of inferential statistics provided by Craig Israelsen in the article I wrote about here. Today I will discuss more of her points.

In an e-mail, the adviser continued:

     > And yet as indicated above, even the most rigorous
     > methods of behavior modeling or predictive algorithmic
     > trading may not remain valid… in the real world of
     > traders and cheaters and wars and unpredictable storms
     > or droughts or inexplicable shortages of sugarcane.
     > The environment in which the science is applied is not
     > static nor predictable. They will allow you to “play a
     > better hand of poker” so to speak, but are not a
     > formula in the strictest sense. Finance as a science
     > is not yet, (and may never be) well-developed enough
     > to agree on basic assumptions about the environment
     > of application…

I consider this a cop-out. The disclaimer “past performance is no guarantee of future results” is cliché and factored into any valid system development methodology. Historical events will never replicate in the future but every interval of time has its own set of potentially market-moving elements. The implementation of statistics is to chop, dice, and recombine a comprehensive survey of the past in a sufficiently large number of ways to allow for study of net returns and drawdowns distributions for comparison—all with the implicit understanding that this is a game of probabilities rather than certainties.

And in most cases, I believe some effort to do this modeling is better than no effort at all.

     > If you’re asking, should he report the outperformance
     > if it’s not found to be statistically significant… I
     > will say that it is not commonplace in retail investing
     > (non-institutional and non-academic) to report
     > outperformance with statistical significance measures.

The lack of peer review rears its head once again.

In my opinion, a lack of statistical significance means the data cannot be used to formulate reliable conclusions (perhaps excepting conclusions to the contrary). Retool the study and do what it takes to get statistical significance so we can at least quantify the possibility of fluke occurrence.

This lack of peer review and conventional reporting of conclusions without statistical analysis brings me back to the question asked in my last post: is this the “knowledge” that filters out to the retail public or does the public get what the academics publish in peer-reviewed journals? If it’s the former then my gut reaction is to be scared while at the same time reaching the epiphany that this may be why I perceive so many flaws in reasoning when I review financial material.