Frequently Asked Questions

The Nasdaq Market Intelligence Desk (MID) is a fantastic resource. We strongly urge issuers on NASDAQ to become familiar with the MID and the wealth of information it offers.

However, the MID does have limitations in regard to market structure:

The MID doesn't break out order flow daily, which is the only way to map market structure. Ask the Nasdaq to describe your market structure in three sentences and see what answer you receive.
Providing insight to your market structure is just not a priority for any exchange, as traders, not issuers generate the vast majority of revenue.
MID does not currently have any way to accurately quantify automated trading.
MID does not categorize order flow.

If you were really ambitious, you could do what we do without us...it's just a lot of work. For example, we currently classify over 700 Market Participants along with their parent brokers and automated trading allocations. And new Market Participants are added and classified daily!

How do I make this information my own – put my own stamp on it?

It’s not our desire that Equity Analysis™ be a pass-along, something that gets forwarded without your own personalization, your stamp of ownership so to speak. That’s why we provide key points and supporting data in our summary snapshots that you can present in your own words to your internal audiences. We also support our service with Flash audiovisual commentary, yet another valuable way to understand and use the information in a way that enhances your role as IRO and market-structure expert.

How do you make information understandable to management?

We will work with you to develop a solution that works best in your situation, and it depends in part on how you interact with management. Our snapshots are designed to provide in succinct point-by-point summary, the key reasons, so you then can put those reasons into your own words. A second point is helping you help management come to grasp that simply asking “Who’s selling our stock?” on down days is not the right or relevant answer anymore. In both cases, we’re committing to supporting you and helping you deliver good answers.

How is a Market Participant’s classification determined?

Classification turns on two market rules: Best Execution, and the requirement for all broker-dealers to report order-routing practices (Rule 606). We’ve then painstakingly applied those rules in building a vast database of trading desks. Further, we customize each subscriber’s analysis based on observed trading behavior.

How long does the trial period last and how do I sign up?

As a rule, we run data for twenty trading days, during which time you’ll be every bit a subscriber, though one without obligation or cost. You’ll never get pressure from us to commit. And if we seem consumed with zeal, we are indeed fanatic believers in what we do, and maybe just a little data-crazed.

How long will it take me to understand this process?

This really depends on you and the amount of time you have to dedicate to the process. Equity Analysis™ is a brand new way of looking at Market Structure and some of the concepts can seem a bit daunting.

Rule of thumb: During the trial period, concentrate on a) seeing the relationship among categories of order flow – the rhythm of your equity market so to speak – b) the effects of program trading, and c) the difference between speculative trading and sponsor order flow.

Focus next on understanding your marketplace so you have accurate answers about its behavior. You’ll be amazed how things work now in electronic markets. This might take 2-3 months.

Finally, move on to refining your sellside relationships by correlating research information flow and underlying trading activity. And begin using your knowledge of market structure to determine who you target on the buyside and how you leverage the sellside to get the most from your targeting and outreach efforts.

We’re confident that an IRO with a non-trading background can become comfortable with Equity Analysis in sixty days. This assumes a once a week web or phone meeting to use as you wish for reviewing the Equity Analysis™ snapshot and another eight to ten total hours of consultation and review as we work together to unfold the magic of market-structure knowledge.

How will you help me to use the information?

At ModernIR, we pride ourselves on outstanding customer service. In addition to the weekly snapshots, we will spend as much time as necessary working with you to gain a better understanding of your Market Structure and help you utilize the information. We know it’s new thinking, a fresh IR concept that takes time to internalize. To demonstrate our commitment to service, we don’t do contracts. If we fail to prove our value every month, you fire us.

Is Equity Analysis™ stock surveillance?

Definitely not. Surveillance is based on settlement, which relies on analyst interpretations of data to determine who actually purchased your stock. This is fast becoming irrelevant in an algorithmically dominated market. Why? First, securities are mixed together now – stocks, bonds, currencies, derivatives, ETFs, on it goes – and stock positions may simply be hedges for returns on other instruments. And second, trading is far more frequent and fluid today, and buy-and-hold strategies – for better or worse – are rarer all the time (that money has moved to private equity). Surveillance has largely been rendered obsolete as result. It’s reactive, slow, inconclusive and piecemeal.

Equity Analysis™ is trading intelligence predicated on the opposite end of the spectrum – executed trades. Why does it matter? Because traders determine and control real liquidity, traders manage costs on both the buyside and sellside and traders drive the algorithms that even fundamental investors now use to manage equity capital. The only way to accurately observe the ebb and flow of real and speculative money, and to thus use that knowledge to help your investors and enhance your equity-research relationships, is to see it the way everybody else in the equity markets does. We think it’s a core, essential reality for IROs now.

It’s the new earnings call – something you simply must do if you’re to be an informed investor-relations practitioner in modern equity markets.

Is Equity Analysis™ technical analysis?

Equity Analysis™ isn’t technical analysis. Technical analysis tracks patterns to predict stock performance. Equity Analysis™ shows facts – the dollars coming into and out of your stock by trading type, such as program trading, speculative trading, prime brokerage and sponsor execution.

Because broker-dealers must disclose order-routing practices (Rule 606) and deliver “best execution,” traders and investors with differing objectives and priorities use specific kinds of execution platforms.

What are the benefits of Equity Analysis™ to an IRO?

Increase credibility with management team by demonstrating detailed understanding of equity market drivers, including quantitative factors
Target investor outreach in context of market structure and sellside support
Improve leverage with sellside through concrete views of trading-desk support
See the new Reg NMS market the way the buy/sell side does
Extend your own IR efforts with ModernIR's expertise

What does Equity Analysis™ complement?

Equity Analysis™ enhances investor-targeting tools by providing market-structure context. And despite the questionable value (in our opinion) of conventional stock surveillance now, Equity Analysis™ can complement it by highlighting the relationship between buyside ownership and sellside order flow. Equity Analysis™ also amplifies messaging tactics (one-on-ones, calls, conferences, etc.) by providing concrete and timely measurement of real – or speculative – responses.

What does Equity Analysis™ replace?

Equity Analysis™ is a new product designed to equip IROs for Reg NMS realities. If you use conventional surveillance services, which cannot map the effects of trading systems and prevalent quantitative investment, then reduce your surveillance costs.

What length is the contract to which I must commit?

We don’t do contracts. We think it’s our job to earn your business every month by proving our value and worth, not our right to lock you into long-term commitments. Either we help you or you fire us. We ask something in return: the only way you’ll know what market structure means to your IR program is to try it. Step up and give it a whirl! You’re making no big, bound, financial commitment. We’re proud to say we have extremely low turnover in our subscriber base.

Why does Market Participant classification matter?

Market Participant classification is the heart of Equity Analysis™. Grouping similar kinds of order flow is essential to understanding what forces are causing stock pressure or appreciation (or volatility). Ultimately, markets function according to basic economics – supply, demand, the nature of the parties behind both, and how opportunists exploit supply/demand gaps. Without grouping trading desks, it’s impossible to get an accurate picture. With more than five years of experience, comparisons, study and refinement, we have great accuracy and certitude.

Why/how was Equity Analysis™ created?

Equity Analysis™ began in the IR chair, grew under the tutelage of traders and matured through year-long beta tests. Tim Quast, ModernIR founder and director, began manually backing into trading-desk order flow while IRO for a Nasdaq-listed telecom company that was first added to the Russell 2000 then jettisoned with all telecom holdings from quantitative and fundamental portfolios following Worldcom’s bankruptcy.

Over three years, Tim spent significant time with traders, coming to understand how the number, size, kind and distribution of participants in the market were the keys traders used to understand the marketplace.

Employing this new knowledge, Tim had great success adding shareholders, reducing volatility and achieving a premium to peers despite significant operating challenges including the first quarterly operating losses in decades, a treasury investigation, the untimely retirement of the CFO, M&A activity and subsequent balance-sheet leverage, and a tectonic strategic shift.

Glossary

Crossing Networks

A crossing network is an electronic financial network for matching orders for execution without first routing the order to an exchange or market center (ATS, ECN, etc.) where the order would be accessible for public viewing. The advantage of the crossing network is the ability to execute an order without impacting the public quote.

ECN

Electronic Communication Network. An electronic system that brings buyers and sellers together for the electronic execution of trades. ECNs disseminate information to interested parties about the orders entered into the network and allow these orders to be executed. ECNs match buy and sell orders internally or represent the highest bid prices and lowest ask prices on the open market. The benefits of trading with an ECN include after-hours trading, avoiding market makers spreads, and anonymity for large trades.

Inter-market Trading System

Inter-market Trading System (ITS) is an electronic order routing system that facilitates inter-market trading of exchange-listed securities by allowing a broker-dealer in one market center to send an order to another market center trading the same security at a better price.

Reg NMS

The SEC approved Regulation National Market System, a 523-page policy designed to provide broad and equal access to liquidity, in June 2005. It took effect (market participants were given time to comply) in March 2007. In essence, the rule requires market centers -- places where stocks trade -- to interact with each other and provide unfettered access to the best price at any other center. There's much, much more, but the details of trade-through (trades must go to the best price) and access provisions frame for broker-dealers and market centers how the goal should be achieved. It effectively did away with the role of the NYSE floor broker, because orders can't be held back and worked at prices different from prevailing ones. And thus, it fosters algorithms and crossing platforms.

Reg NMS Cheat sheet

Self-Regulatory Organization

An SRO is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and regulation. The ability of an SRO to exercise regulatory authority does not necessarily derive from a grant of authority from the government.

Trade-Through Order

A trade-through order is an order that is executed at a price inferior to the best posted bid or ask. Basically, the market maker who received the order is unable or unwilling to fill it at the best posted bid or ask price. As a result, the trade is instead executed at the market maker’s price.

VWAP

Volume Weighted Average Price. Example: A portfolio manager wants to sell 50,000 shares The broker agrees to buy the block of shares at the VWAP at the close of the current day. The broker is betting that they can make money utilizing algorithms to sell the shares for more than the VWAP.

Investor Relations

Are you a laggard or a leader?

Investor Relations is changing. New marketplace rules require new IR tools. Gaining an understanding of how Market Structure affects your stock not only makes your IR program more progressive and sophisticated, but if stock-exchange trends continue on the current trajectory, will soon become a necessity. It’s not a matter of if you will need to understand the process, but when.

How do options affect stock price movement?

There is no easy answer. Derivatives strategies are wildly complicated (and successful) today. The bigger reality is that derivatives pull capital away from investing strategies and into trading systems, and derivatives of both equity and credit varieties may limit the attractiveness of your equity to investors, because derivatives can function like caps and collars on stock-performance. We have seen high-frequency traders like Renaissance leverage options against stock portfolios that collectively changed little in price yet delivered enormous derivatives profits to Renaissance. Market structure, however reveals these effects and can arm you with facts to set realistic expectations for management. Further, you can get more bang from your outreach buck by knowing how and when derivatives or convertible hedges are set.

How do we know whether to focus on value or growth investors?

See question on investor outreach, above. Markets with significant liquidity pools and less high-frequency trading appeal to value investors (who wish to buy large quantities at appealing relative prices). But a tight market structure with plenty of program trading might appeal to GARP investors because any increase in demand is likely to be self-fulfilling against the same supply, thus fostering reasonable appreciation.

How does Equity Analysis™ help me get more value from investor outreach?

Two examples: 1) Learn whether program traders are positively or negatively affecting your stock. If your prepared message for investors is a growth story, but the economics of acquiring liquidity will find no appeal to growth investors when the trade reaches the desk, you should spend time with other kinds of investors. Or you’ll waste your and your CEO’s time. 2) Which sellside firms consistently bring value investors in during dips? These features of your market structure can be observed. During down markets, those are the firms whose institutional equity sales forces you’ll want to leverage for one-on-ones when you’ve got five hours in New York and want to make the most of it.

How prevalent is program trading?

Aite Group estimates that at the end of 2006, the share of algorithmic trading will approach 33% of the total equities trading volume. By the end of 2010, Aite Group estimates that approximately 53% of all equities trading will be done through algorithmic trading.

Read the entire article

But by our calculations, Aite Group is way off. Virtually every broker-dealer today is executing at least some order flow by algorithm. Black boxes – mathematical trading systems – have, wholesale, replaced human traders and floor brokers. The auction system is, for all practical purposes, gone. The NYSE is essentially a less sophisticated version of the Nasdaq now. By our calculations the daily percentage of order flow driven in some fashion by computerized systems, be they programs, algorithms or some other system, is well over 60% already and fast approaching three-quarters of all daily trading.

Trading Intelligence vs Stock Surveillance

Which of these paths you choose depends in part on your IR philosophy – but face it, surveillance is an old solution for old markets before derivatives, and algorithms and programs and Reg NMS revolutionized broad market structure. Plus, surveillance is reactive, with portfolio identification the objective and trading an afterthought. By contrast, Trading Intelligence is proactive, with your stock like currency and your IR program an economy reflecting supply and demand. Trading intelligence allows you to see your market the way those setting equity prices do – which is after all, the answer to why your stock goes up or down. In short,

Trading Intelligence helps you to:

See the response to news, events and IR outreach
Keep pace with electronic markets and proliferating mathematical trading strategies, structured products, and programs
Reveal sellside support and divide fundamental and quantitative forces
Receive a complete and modern view, through trading, of ownership changes.

What are dark pools?

Dark pools are liquidity in your stock that is not transparent to the markets.

For more detail, please see our article What are dark pools?

What are the trading patterns of my stock saying?

This is where ModernIR’s experience comes into play. We work with you to review and understand just what is occurring with your Market Structure and help you leverage this understanding into more effective IR tactics, measurement answers and results.

What is 'market structure'?

In economic terms, it's the number, size, kind and distribution of buyers and sellers. For investor relations practitioners, the markets globally are moving to a participant model and away from classic NYSE-style auctions, thanks to trading automation and market regulation requiring transparency. Since the number, size, kind and distribution of participants determine how the buyside and sellside interact with equities, and therefore how equities are owned or traded, it's crucial for IROs to possess basic comprehension of their stocks' market structure.

For detailed explanation, please see Market Structure - Key Words for IRO's Lexicon - by Tim Quast in Investor Relations update.

What percentage of the trading of our stock is speculative?

Using Market Participant classification, this type of question is easily answered through Equity Analysis. We can also provide you with custom reports if you need additional information not included in the weekly snapshot.

What's going on with my stock?

What CEO or CFO doesn’t ask on occasion – and some ask all the time! How did you respond accurately in electronic markets without knowing your market structure? We’d argue that you can’t. Period. Accurate answers and actions in Reg NMS markets demand market structure knowledge. See the Equity Analysis™ FAQ for more.

What's the difference between program trading and algorithmic trading?

Technically, the first refers to trading baskets of securities to achieve an investment objective, while the second refers to trading securities of all kinds based on a mathematically derived and executed strategy and desired outcome. Practically speaking, the terms are probably becoming interchangeable now, since algorithms may drive program-trading strategies. Whatever the case, the point is that mathematics, databases and software are in widespread use across the securities markets, and these systems, much more than individual buyers and sellers today, determine price and market direction.

Why should I be concerned with what traders are doing?

With the increasing dominance of algorithmically generated trading, it’s likely that machines drive the majority of your stock’s activity. These forces determine values much more often than do fundamental factors now. If your knowledge base doesn’t include them, your answers to questions about stock price are bound to be wrong. Of equal importance, cost of capital is affected by volatility.

Market structure offers a key way to improve interaction with the buyside – because trading costs and risk-management factor heavily into investment decisions now. Plus, exchanges are becoming global and electronic, and will soon provide full balance-sheet trading: bonds, currencies, options, futures, exchange-traded funds and equities on a single platform (the NYSE’s stated strategy, the Nasdaq’s direction too). These Reg NMS realities require IROs to understand trading in a way not necessary when the equity markets behaved differently.

Misc

Why should I sign up for your weekly email, The Market Structure Map?

If Reg NMS, algorithms, programs, dark pools, crossing platforms, arbitrage, high-frequency trading, Rule 606 and speculators sound like a foreign language to you, The Market Structure Map is a gentle way to educate yourself. Each week we address a market structure issue and explain why it matters to IROs. We’re confident you’ll find no other regular educational email quite like it – and it’s not as dry as you might think!

Frequently Asked Questions

Equity Analysis™

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Equity Analysis™

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