US Stock Market is Made of These!

“Study the science of art. Study the art of science. Develop your senses — especially learn how to see. Realize that everything connects to everything else.” — Leonardo Da Vinci (~1500)

“The real voyage of discovery consists, not in seeking new landscapes, but in having new eyes.” – Marcel Proust (1923)

In August 2018, I did what I rarely do anymore: Cut an article out of a newspaper. The title and topic caught my eye, and eventually became the catalyst for some of the analysis presented here. Amongst all the digital gear, I still needed a physical marker to remind me…

The Stock Market Is Shrinking. That’s a Problem For Everyone.” (Jeff Sommer, New York Times, 8/4/2018) It turns out that if you search on a title like this, the story comes up several times over the past couple years. Forbes actually did a similar story after the NYT did the one above. Barron’s did one before that, in mid-2017. In any case, the articles from 2018 are both based on a report by Rene Stulz of the National Bureau of Economic Research (NBER).

Now, out of love and respect for certain of my family members (and holding on to the recent Rose Bowl victory), I will forgive Rene for his Buckeye affiliations – and move straight to the core visual of his research (below):

You can refer to what Rene has to say about the implications of a declining roster of public companies from the links provided. Our goal here was to expand on that with a different perspective; take the current 13F report analysis that we were conducting to perform our own analysis on the composition of the US “Stock” Market.

Here’s the gist of what we found so far:

Last week, during the lull between the Christmas and New Year’s holidays, we published a teaser of our analysis that took the quarterly list of 13F securities published by the Securities and Exchange Commission (SEC) and then dissected those lists into the component parts of stocks, options, debt-related instruments, ADRs, fund structures (like exchange traded funds – ETFs), and others.

That teaser showed a subset of stocks vs ETFs for the 10 quarters beginning Q1 2010 – and two quite distinct trajectories that correspond to some of the key findings of Stulz and the NBER (below).

However, when we expand our version of the analysis, things look a bit different: Though it has ebbed and flowed during the full sample of 13F securities files provided by the SEC – 91 quarters beginning March 31, 1996 thru September 30, 2018 – the total 13F securities list has been at or near a series high of nearly 16,500 listed securities since late 2015. This is after a series low of 12,745 securities set in Q3 2003 (see below).

So, assuming the SEC is as reliable a data source as the CRSP database used for the NBER research, the list of securities in the US “stock” market is actually not shrinking, it’s at what appears to be an all-time high.

What is actually going on here is the composition of the US “stock” market is changing – and that’s been going on for years. In the case of stocks (according to the 13F data), that component of the overall “list” has been flat since 2012. In the case of ETFs, no secret there; they have been growing strongly of late. The following chart illustrates Alphacution’s estimate of stocks relative to fund structures, like ETFs based on the SEC 13F data source:

The variance in growth (since Q1 2010) for a broader list of security or product types can be shown better in the chart below:

Two points in conclusion:

First, the CRSP data underpinning the NBER research shows total US-listed public companies for year-end 2016 at 3,627. Alphacution’s estimated, based on 13F securities lists from the SEC for the same period, is 5,011. Now, I can concede to some of this nearly 1,400 company variance being due to a subset of REITs or closed-end funds that may still be in our “stock” sample (and not in the funds estimate), but that variance is not nearly as high as 1,400 – so we will need to reconcile the data sources if this research goes any further. The fact of the matter is that public companies are down significantly from a high of over 8,000 in 1996.

Second, and more importantly, the shifting product composition of the US “stock” market has significant impact on trading and investment strategies. If we were to add the number of ETFs and options together, they would represent 67% of all products on the 13F securities list for Q3 2018. In other words, derived products are a MAJORITY of  the US STOCK market today.

Let that sink in for a minute…

Whatever this shifting composition – and the total roster of US public companies, specifically – says about the broader economy, the fact that the roster of underlying products is smaller than the list of derived products in this market can’t be healthy…

As always, if you value this work: Like it, share it, comment on it – or discuss amongst your colleagues –  and then send us

As our “feedback loop” becomes more vibrant – given input from clients and other members of our network, especially around new questions to be answered – the value of this work will accelerate.

Don’t be shy…

By | 2019-01-11T16:20:12-05:00 January 3rd, 2019|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.