Back in 2000 if you were to buy a new program for your shiny new Intel Pentium computer, you might have been given a stack of these peculiar strange objects pictured above. For my younger readers – these are called floppy disks. Loading these onto your computer was a laborious boring affair. Microsoft Office itself was more than a couple dozen of these disks.
Eventually computer manufacturers figured out how to get software onto CD Roms, and then DVD ROMS, and today we simply download programs from the Internet. Things have gotten a lot better since 2000.
Same thing goes for the securities industry. I remember when Nasdaq stocks traded with a half point spread. At that time, retail orders would only get filled when they paid the offer or hit the bid. You could sit in the middle of the bid and offer all day, and if the quote didn’t lock against you, the order would not be filled. I remember on a particularly busy day for Intel, my buddy who knew the Morgan Stanley Intel Nasdaq trader, told me that this trader had made $10 million bucks trading just this one stock. I responded that he much have taken a big view and nailed it. But he said, no – the stock had traded 80 million shares and the Morgan Stanley was the biggest trader. He simply bought on the bid and sold of the offer all day long. That was the sort of inefficiency and unfair dealing that investors were plagued with. Eventually the Nasdaq was forced by the SEC to automate and open up their markets in a fair manner, but it was only under the direct orders from the authorities that anything changed.
Around this same time, there was also a big problem with selective disclosure from issuing companies. CFOs would give nods and winks to sell side analysts who would then give that information to their best clients ahead of everyone else. By the time the actual news was released to the public, the market had already done a fair amount of discounting. The retail investor was the very last to know.
The SEC decided that this undermined the basic notion of fair play. They therefore drafted up a rule labelled Regulation FD (Fair Disclosure). From the SEC’s website:
Information is the lifeblood of our securities markets. Congress enacted the federal securities laws to promote fair and honest securities markets, and a critical purpose of these laws is to promote full and fair disclosure of important information by issuers of securities to the investing public.
Regulation FD (Fair Disclosure), a new issuer disclosure rule, deals with the problem of issuers making selective disclosure of material nonpublic information to analysts, institutional investors, or others, but not to the public at large. Although analysts play an important role in gathering and analyzing information, and disseminating their analysis to investors, we do not believe that allowing issuers to disclose material information selectively to analysts is in the best interests of investors or the securities markets generally. Instead, to the maximum extent practicable, we believe that all investors should have access to an issuer’s material disclosures at the same time.
Let me repeat that last line one more time. Instead, to the maximum extent practicable, we believe that all investors should have access to an issuer’s material disclosures at the same time.
It is tough to argue with the logic that the playing field should be as level as possible. You will get no arguments from me.
But I am a little perplexed as why it is illegal for Apple’s CFO to get a bunch of sell side analysts together in a closed room and give guidance about the company’s future plans, yet for Janet Yellen it is completely acceptable to have a closed door meeting with Senate Democrats in which she outlines her future plans for monetary policy.
Which is exactly what just happened. Yesterday Yellen met with Senate Democrats in a closed luncheon. Out of nowhere the stock market exploded higher.
And no wonder. As the news trickled out it became obvious that Yellen had indeed given a wink and a nod about future monetary policy.
“Her message is that the economy’s getting better but there’s still a ways to go in terms of job creation and that worry seems, in her mind, to be paramount and that’s why she is not going to raise rates immediately,” Sen. Chuck Schumer tells Bloomberg’s Kathleen Hunter. Asked if Yellen gave senators sense of timing for raising rates: “She talked about it, but I think you’re going to have to ask her”
If there was no material non-public information given, then why did Chuck Schumer refuse to convey it? The answer is of course that Yellen did indeed communicate information privately to this group of privileged and connected Senate Democrats.
This was the furthest thing from the SEC’s mandate that all investors should have access to material disclosures at the same time. I would argue that the Federal Reserve’s Chairperson’s guidance regarding future monetary policy should be given in a public speech, not some closed door meeting in Washington.
The Federal Reserve is publicly trying to send the message that rates are headed higher, but then privately Yellen is giving guidance that rates are not headed higher anytime soon. The message should be the same to all parties.
No wonder the market has consistently ignored the Fed’s fabled dots. They don’t mean squat.
And this is yet another example of how much the world’s Central Bankers are simply flying by the seat of their pants. The market is waking up this notion. My main worry is that the market’s confidence in Central Bankers is going to pull a “Hemingway.”
‘How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually and then suddenly.’ – The Sun Also Rises… Ernest Hemingway