The Lemon Fool

Today I have tried and failed to bag a transaction worthy of some of our more sophisticated Fools, as I thought I saw a potential bargain in a very thinly traded VCT.

A bit of digging first at google finance then at LSE told me the last transaction was on June 13th, when someone sold 10k shares. Nothing at all before that, except for a matched pair of transactions several months earlier: my guess would be that was a bed&ISA.

So, I infer the market maker has been sitting on 10k shares since June 13. The shares are offered at a 20% premium to what they had been sold for. But if I make an offer for the exact 10k, can I haggle that down to a 5% premium?

Turns out I couldn't, so the market maker is still sitting on those shares. Should I have been able to get a deal in those circumstances, or was that totally unrealistic. Any tips?

UncleEbenezer wrote:
So, I infer the market maker has been sitting on 10k shares since June 13.

In speaking to the market maker (assuming you got to speak to them) do you know they were the purchaser? Did the VCT purchase the shares itself, as often happens (at a discount to NAV)? Market makers are more open to persuasion when they have an open position, if they don't, and by accommodating you they are opening a position, then it is unlikely they will improve, particularly in an illiquid stock.

I didn't speak to the market maker myself, only to my broker (well, someone on their dealing desk, not someone I actually know). I asked him if it was a realistic kind of thing to try, he shrugged and said he could only try. He also left my bid open for the rest of the day, for what that (evidently wasn't) worth.

When a VCT itself buys, I expect to see an RNS. And usually a rather lesser discount to NAV than this one.

When you talk about speaking to market maker, is there a channel for members of the public to do that unmediated?

UncleEbenezer wrote:
When you talk about speaking to market maker, is there a channel for members of the public to do that unmediated?

I used to be a market maker, although not in equities, and certainly not in illiquid VCT shares. In short the answer is no. I would normally only speak to my "sales" person, although my relationships were such that I would often talk directly with the customers as relationships were good. However these were all institutional accounts. Even were I speaking to retail brokers where the relationships weren't as good (infrequent communication rather than cherry picking more valuable business),I would certainly not speak to the end customer.

Therein lies the problem of trying to do the best customer service on behalf of your employer, yet exposing yourself individually to regulatory inspection. Having worked through different eras the post-crash era of hurried, irrational (over?)regulation, and managerial (over?)reaction and pre-empting to it, was one of my least favourite times doing my job.

In practice I suspect you can't do much more than what you have tried, and it would take someone on your broker's dealing desk doing more than what they would normally do to get a result. Not impossible of course, but employees are much less incentivised than before to get such outcomes, and indeed in a number of scenarios much more disincentivised to do anything other than follow established procedures of "how things are done around here".

I may be overly cynical, and other markets work differently to the one(s) I was in, but having lived it first hand, I share your frustrations at not being able to do what in theory should be possible.

UncleEbenezer wrote:When you talk about speaking to market maker, is there a channel for members of the public to do that unmediated?

Writing from memory, I feel sure that I have seen several VCTs inviting shareholders to contact market-makers directly and giving contact details in the reference section of their annual reports. Of course, any subsequent trade would have to go through a broker but I did call one of them some years ago and at least he was able to put me in the picture so I knew I was wasting my time trying to do a certain trade.

dealtn wrote:I used to be a market maker

Thanks a lot for the insight. I'd love your comments on today's thoughts re: conflict of interest.

I spoke to the market maker today. Put the suggestion that I'd be interested to relieve them of an entire holding that had been sitting on their books, and was I correct that it was those 10k from June 13? Same reply: they weren't going to give me a decent price. They pointed out (rightly) that it was well below the NAV, and (more interestingly) that they were happy to hold for themselves.

That looks like they're both market maker and investor. Isn't that a huge conflict of interest? Seems to me that if they want to insist on near-NAV, they should jolly well have paid nearer to it to the poor sod who sold at a lousy price. The low price should reflect likely difficulty in selling, not build in a big profit margin. And I was offering a margin of over 5% on what they'd paid!

BTW, if anyone's interested, the share in question is FTSC - Foresight Solar "C" shares. The quoted spread seems to have a "don't bother" subtext. I'm not bothering any more.

Uncle

You need competition, ie more than 1 market maker, then spreads will usually come down.

With only 1 market maker, then you are entirely beholden to them.

If the profit was there, then there would be more market makers.

Not really what we can do to encourage more market makers in VCTs.

Blagdon

UncleEbenezer wrote:

dealtn wrote:I used to be a market maker

Thanks a lot for the insight. I'd love your comments on today's thoughts re: conflict of interest.

Unfortunately there isn't much of an overlap between what I used to do and this market. I ran a GEMM, market making UK Gilts to mainly institutional accounts with razor thin bid-offer spreads. So (in theory) very liquid bonds to wholesale accounts. VCTs are generally illiquid equity investments to retail accounts.

We certainly by necessity had positions in underlying bonds, though we wouldn't have described ourselves as investors. We would have both long and short positions in bonds, by choice, and by necessity (not all positions can be unwound easily in a short time frame). Whilst not investments such positions were consumers of our company balance sheet (in fact it was double counted - don't ask it was complicated and a "normal" inefficiency of my employer who perhaps it's best I don't name), and it was the capital cost of running the positions, as much as the p/l with the position that were determinants of how long we might hold any open market risk.

I have no reason to suspect your market maker doesn't also have balance sheet constraints, but perhaps with such illiquid stock his management may allow greater flexibility on how open risk positions are managed. As such the holding may be considered part of the "back book", not the market making book. For what it's worth, although its comparing "apples with oranges", if I had one of my staff with a reasonable chance to exit a long standing open position in a lesser liquid instrument, I would expect greater engagement.

Not sure that helps you much, but it looks like you are happy to move on rather than pursue it further.

dealtn wrote:Unfortunately there isn't much of an overlap between what I used to do and this market.

Fair enough, and thanks. I guess I was putting you on the spot by asking for comment on such a specific and loaded question. Sorry, I shouldn't have, and I respect your reticence.

Just mildly annoyed at failing to get the shares. Not easy to find relatively-reliable assets without overpaying!

I think my contact and/or posting here may have made a difference!

The last trade in FTFC is still 10k shares at 71p, on June 13th. But now, with no new trades, the spread is showing as 80-85p. Anyone hold FTFC? Can you get your platform or Computershare to quote you a price for your shares (without actually selling)?

Generously taking the new range as fair, I guess we can now quantify how much the poor sod who sold at 71p was short-changed, and how much of the market-maker's profit is an abuse of monopoly.

UncleEbenezer wrote:

dealtn wrote:I used to be a market maker

Thanks a lot for the insight. I'd love your comments on today's thoughts re: conflict of interest.

I spoke to the market maker today. Put the suggestion that I'd be interested to relieve them of an entire holding that had been sitting on their books, and was I correct that it was those 10k from June 13? Same reply: they weren't going to give me a decent price. They pointed out (rightly) that it was well below the NAV, and (more interestingly) that they were happy to hold for themselves.

That looks like they're both market maker and investor. Isn't that a huge conflict of interest? Seems to me that if they want to insist on near-NAV, they should jolly well have paid nearer to it to the poor sod who sold at a lousy price. The low price should reflect likely difficulty in selling, not build in a big profit margin. And I was offering a margin of over 5% on what they'd paid!

BTW, if anyone's interested, the share in question is FTSC - Foresight Solar "C" shares. The quoted spread seems to have a "don't bother" subtext. I'm not bothering any more.

One of the funniest posts I've read for a long time.


GS

UncleEbenezer wrote:The quoted spread seems to have a "don't bother" subtext.

A few weeks ago, there was a report published by a broker and a market maker bemoaning the lack of liquidity in the market.

As you can guess, the one thing they didn't mention was the high spread acting as a deterrent to liquidity. Well, with a market maker contributing to the report, that was always going to be "overlooked".

I'm fairly sure the high spread is a self-reinforcing mechanism.

For instance, if the bid on a stock is 1240 and the offer is 1150, it's more of a "buy and hold" stock than one to be regularly traded. So people don't trade it, helping to preserve low liquidity and high spreads.

Frankly, I don't care about low liquidity for a significant percentage of my portfolio.
What I do object to is the spread and being several percent down after buying such a stock.
What I'd like to see is a facility where retail investors can, at a sensible cost, put in their limits for a "matched bargain trade". Even if I had to wait a few days, I still like it better than buying with a huge spread.