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It's time for a public hearing about what's going on with our stock market.
I've said Michael Lewis' claim that the stock market is "rigged" is a gross exaggeration, but we can thank him for one thing: the megaphone he has with "60 Minutes" has helped revive a sleepy debate on what is right—and wrong—with our market structure.
And now, it is time to strike while the iron is hot: It's time for the U.S. Securities and Exchange Commission to convene a series of public hearings on the stock market.
Bring in exchange heads, asset managers, regulatory experts, academics.
Let's examine all the new market data that the SEC has been generating recently about trading volumes, and about high frequency traders.
Let's get some consensus of what has gone right, and what has gone wrong.
Most importantly of all: Let's open up Reg NMS, the rule that came into effect in 2007 and helped "cement" much of the current market structure.
Michael Lewis gave an interview to "60 Minutes" ahead of the publication of his book, "Flash Boys."
He alleges that the stock market is "rigged" by a cabal of high frequency traders, stock exchanges, and Wall Street firms.
He alleges that a lone fellow, a trader named Brad Katsuyama, figured this out and formed a new exchange, IEX, to combat abuses perpetrated against the investing community.
He alleges that high frequency traders are able to front run orders, which means they are able to buy in front of you and sell them back to you when you want to buy.
The problem, he says, is in the plumbing of the stock market. In the most interesting part of the interview, they showed a moving diagram of an order that leaves downtown New York and goes to the BATS exchange servers in Weehawken, N.J. Because the exchanges all connect to each other, the order then goes to the servers of the New York Stock Exchange, which is a few miles away in Mahwah, N.J.
Michael Lewis' new book, "Flash Boys", has generated significant interest in the trading community. It's about high-speed trading. I haven't read Mr. Lewis' book (it's not out until Tuesday), but I have done something almost no one else has done: I've read the S-1 for Virtu, which is a high-speed trading firm that is slated to go public, likely in the next few weeks.
The S-1 is over 200 single-spaced pages, but it is an interesting window into the world of high-speed trading.
It has generated a lot of publicity because of this claim: "As a result of our successful real-time risk management strategy, we have had only one losing trading days ince January 1, 2008."
Only one losing day since 2008? How can that be? It's impossible, isn't it?
We saw something fairly unusual for an IPO this morning: A trading halt.
Energous (WATT), which develops wire-free charging technology, priced four million shares at $6, then opened at $9.50 around 10:25 a.m. ET. It went to $10.79 at 10:29 a.m. ET, then was halted at 10:31 a.m. ET at $9.02, because it tripped a circuit breaker that says if a stock moves more than 10 percent in five minutes, it's halted for five minutes.
I am a big supporter of circuit breakers, which were initiated after the Flash Crash in 2010. But in the case of an IPO, many market watchers, including Eric Scott Hunsader at Nanex, believe that it may be better to be a little more liberal with them. Perhaps double the trading bands to a 20 percent move in five minutes before a trading halt is called.
It's been a mixed picture with IPOs today…while all six got priced, the first-day price pops are not materializing, with only one (Energous) a clear winner, up 50 percent. Two of the five that are open for trade are down from their initial price.
Opening ABOVE the initial price:
Opening AT the initial price:
Opening BELOW the initial price:
Still waiting for Bluerock Residential Growth REIT (BRG) priced at $14.50, to open at the NASDAQ.
After a rough week, six initial public offerings (IPOs) priced at sensible levels. One priced below the range, a couple at the high end, a couple in the middle. Yesterday's double-digit rally in three offerings have greatly reduced the anxiety that was created when King Digital IPO fizzled on Wednesday.
On the Big Board:
1) Aerohive Networks, a cloud-based mobile network platform for businesses, priced 7.5 million shares at $10, in the middle of the $9 to $11 range;
3) Online health-related content provider Everyday Health priced 7.1 million shares at $14, in the middle of the $13 to $15 range.
Divergent market trends: Weakness in small- and mid-caps and "new tech," and strength in emerging markets.
Market weakness is now evident in several key sectors. While the S&P 500 is down fractionally as we approach the end of the month, we are seeing notable weakness in other sectors:
What's up with those names? As Bill Miller pointed out on our air today, when growth is in short supply, traders will pay up for any stocks that have growth. But if there is a perceptionthat growth is picking up, then traders will try to rotate out of those high-priced growth names.
Remember the big trade at the start of the year: Short emerging markets, go long "new" tech.
That trend has now reversed: The main emerging markets ETF (EEM) is not up six days in a row and has broken out to the highest level since the beginning of the year.
The criticism of EEM is it is weighted toward a small basket of countries like China and Brazil that are largely dependent on commodities. It's true China and Brazil have been rallying strongly in the last six days, China on hopes of additional stimulus: China (FXI) +6%, Brazil (EWZ) +8%.
But other emerging market countries in the past six days have also been strong:
These countries are not so dependent on commodities. Mexico has had a strong move off the bottom, as has Chile.
Elsewhere: What's up with the close? It's the most widely discussed topic among active traders: The weak close. Many days in March we have started strong, but weakened mid-morning, often after 10 a.m. ET.
Traders have been grousing about this for a couple weeks, but this morning Paul Hickey at Bespoke finally put a little more flesh on the bones.
His recommendation: Buy low and sell high by buying the close and selling the open. "Buying the close every night and selling at the open the next morning led to an outperformance of 2.25% versus buying the close and selling at the close each day," Paul wrote.
But you can do even better if you sold at 10 a.m. ET, producing returns of 4.98 percent higher than buy and hold.
Paul is smart enough to know that this pattern does not last forever. It works until it doesn't work.
Why is it happening? Maybe it's people in Europe selling out of the U.S. and buying emerging markets. Maybe a lot of people just stop trading in the middle of the day.
The wave of initial public offerings continue to be mixed. After yesterday's disappointment with King Digital Entertainment, the IPO market is on pins and needles, watching new offerings very carefully.
With that said, three IPOs priced overnight. The early word: one priced below, one in the middle, and the other above.
King Digital prices at $22.50, trades as low as $18.90 and closes at $19.00 in its NYSE debut. It broke. Badly.
I told you in my Trader Talk yesterday that the IPO market was holding up well--until yesterday. First-day IPO pop for the 55 IPOs that have gone public this year was up a healthy 22 percent; the after-market pop (the percentage the average IPO has been up since its IPO) was also a solid 29 percent.
Until today. There are several recent IPOs that are showing signs of weakness. A10 Networks (ATEN), which optimizes data center performance, went public last week at $15 and is now trading below its IPO price, at $14.55.
Many other companies that went public last week: Paylocity (PCTY), MediWound (MDWD), Amber Road (AMBR) and Q2 Holdings (QTWO) are trading below their first-day pop. They're still above their initial price, but the IPO after-market premium is shrinking fast.
But the failure of KING (OK, it's not a failure, but it's a big disappointment) is sending a ripple through the IPO community. There's not fear yet, but there is concern.
What you want to look for are two things: Cancellations and repricings. Not seeing cancellations yet, but there is much higher risk of repricings.
There are three IPOs pricing tonight, representing a good cross-section of the IPO market:
If any of them postpone, or any prices below the price talk, that would cause greater concern.
There's an additional five more tomorrow night, including CBS Outdoors and Everyday Health.
By the way, in my opinion, it would be healthy for a small deflation in the IPO market. Not a full-on meltdown, that would only happen if the overall market collapsed. But a gentle de-escalation would be welcome.
-By CNBC's Bob Pisani
Is the IPO market in a bubble? What an obsession this has become in the last few days! On the surface, the IPO business is terrific: There have been 53 IPOs so far this year that have raised about $8.5 billion, far more than last year. There are also dozens of companies slated to go public in the next couple months.
But is the market in a bubble? There are a couple ways to look at the strength of the IPO market:
First: Opening-day pop. The average rise on the first day between the offering price and the closing price for IPOs this year has been 22 percent, according to Renaissance Capital. That is well above the historic average of a 13 to 15 percent gain. During the internet bubble, for example (1999-2000), the average return on the first day was over 50 percent.
Conclusion: Still healthy.
Second: Post-IPO return. This is arguably a more important metric. For the companies that have gone public this year, from the IPO price until the close yesterday there have been an average gain of 29 percent.
That's good, but that figure has been dropping in the last few days. That's important, because that number is very carefully watched by the IPO community. Why? Because people who are pricing IPOs now and in the near future watch that number, and when the number is dropping they will become more cautious on pricing their IPOs.
It makes sense: if prices for recent IPOs are dropping, investors in IPOs in the near-future will be more cautious.
Conclusion: Not alarming yet, but bears watching.
Third: How a basket of IPOs track against the S&P 500. There's an ETF for that: As of yesterday, the Renaissance ETF (IPO), a basket of recent IPOs, is up 2.8 percent for the year, versus an 0.5 percent gain for the S&P 500. However, that gap is narrowing in the last few days.
Why is the gap narrowing? Investors are worried about the froth, but they are also worried about the economy. I have said this many times: the health of the IPO market depends on the health of the economy and the stock market. These companies trade on perceptions of future revenue growth. If there is concern about the economy--or they think valuations have gotten too far ahead of themselves---IPO investors will look for a repricing.
Conclusion: Not alarming yet, but trend is worrisome.
Here's what to watch for in the coming weeks:
First, IPOs getting pulled. There are not many signs yet. However, last week Globoforce (THNX), a cloud platform that did employee rewards, was pulled.
Second, repricings. This is my main bellweather. Watch for repricings--I mean stuff that starts to price below the expected ranges.
That will be the first sign investors are starting to get more conservative. Pay particular attention to the economy, because we should be seeing signs that the economy is doing better after a miserable winter.
These IPOs are, for the most part, growth companies.
If the economy does not grow as fast as anticipated, growth companies will see a pullback in their IPOs.
This is particularly true of "cloud computing"-type companies that for the most part make no profits.
Third, watch the recent IPO after market. Another good barometer. How is stuff trading that just went public?
I see some concerns here. Look at A10 Networks (ATEN), which helps improve data centers, priced at $15 on Monday, went to $16.50 on its first day, but is now at $15 and looks like it might break.
Look at Castlight Health (CSLT), which helps companies with healthcare solutions. Went public less than two weeks ago, had a 148 percent pop on its first day of trading and was over $40, is now at $24, still above its IPO price of $16 but down every day since it began trading.
A bit worrisome.
Bottom line: We are at a very important juncture in the IPO market. Recent IPO pricings must stabilize and economic news needs to keep improving.
A lot of IPOs are depending on it.
Bill Ackman also tells CNBC that Allergan's poison-pill defense doesn't make his takeover bid more difficult.
The bull market is seeing the equivalent of its first gray hairs and the proof is in Tuesday's blast of merger activity.
Greenlight Capital supports the subject of the book 'Flash Boys' and thinks investors should consider routing orders there.