Ir Electronic Trading And Prime Brokers
ModernIR tracks categorized trading volume (execution), which is different from stock surveillance (settlement data). We categorize the execution data to identify the forces at work in stock trading. If the equity markets don?t recapture early October highs, we think the source of the rupture will be a result of trading actions on October 10th and 11th.
There are three primary order flow forces behind a stock's daily volume: a) electronic order-matching, b) program trading, and c) speculative arbitrage that occurs around the first two forces. It?s not out of the ordinary for the three forces to drive 90% of volume. In order for equity markets to maintain a semblance of efficiency and support both trading and investment, equilibrium among these forces is desired.
For instance, on October 8th, electronic trading increased and by the 10th accounted for 44% of all order flow, about 20% more than either programs or arbitragers. On Thursday, the big Prime brokers behind programs essentially said, ?All right, everybody, out of the pool.? Whether this order flow was the result of the broker-dealers pressing the reset button themselves or responding at the behest of institutional clients is unclear. Whatever the reason, the markets have not been the same since ? and options expire on Friday right during the midst of third-quarter earnings reports.
So what's going on and what does it mean for investor relations? It may be that large primes like UBS Securities are able to watch order-flow imbalances across many different asset classes and perhaps even intervene for the sake of regaining institutional order flow. After all, if the buyside chooses to skip brokers and go directly to the markets through electronic systems, that eventually translates to lower revenues and earnings for broker-dealers. We also suspect that speculators in currencies (?forex?) and commodities leveraging off equity platforms got tripped up by their own models. Maybe this is why oil continues to make new highs?
Regardless, these actions impact the responses of institutions to fundamental business performance. If you don?t understand their role in your equity market ? call us redundant to the point of exasperation ? you can waste precious IR time, money and effort working at results that can?t be obtained.
And if you?re blessed with great business catalysts, the current market conditions are very favorable.
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