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How can I use Equity Analysis as part of my IR program?
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. Settlement and trading have become widely disconnected in today’s trading markets where a great deal of daily volume comes from parties that may never really take ownership of shares. They work through swaps and prime brokers. What’s more, changes in custodial accounts tracked by surveillance may have little to do with investment. Thus, concluding that your stock moves because your surveillance team tells you Institution A bought shares could be wildly inaccurate. It’s not that surveillance is entirely irrelevant. But it’s ill-equipped for maker/taker markets. At minimum, reduce your expenditures on surveillance and dedicate a portion of the savings to market-structure analytics, which alone can help you sort what’s real from the noise.
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.
ModernIR developed this proprietary mathematical measure to depict the price where rational, or fundamental, investors will step in to buy to a degree where their order flow is setting the price of a company’s stock. With few exceptions, executed trades must meet at the national best bid or offer in U.S. equity markets. Executions must match standard deviation on “best execution,” or measures of trading efficiency. In addition, rules allow investors to recoup some trading costs through soft-dollar and commission-recapture programs. With math, rational behavior can be distinguished from other behaviors.
Fundamental investors are the types typically targeted for outreach in an investor relations program, but in modern capital markets these investors make up a small percentage of total shares traded (they don’t constantly come and go). Accordingly, their order flow sets a company’s stock price rarely in a capital market with so many competing forces, many of which are driven primarily by speed. What’s important to note is that even small footprints of rational activity can change a company’s market structure and price as the other market participants notice and react to this order flow. Bottom line, outreach matters more than ever today, but it must be well-targeted to count.
How can I communicate market structure themes to my management?
As part of our Equity Analysis service, we provide a weekly management report to outline key trading themes, graphical depictions of market structure and rational price, and other pertinent observations from our Equity Analysis. The report is provided in a simple format, ready for you to supply to your management team.
To best equip you with the information you require, we provide unlimited phone and email support to our Value and Premium service clients. We’re here to answer your questions and ensure you have all the market structure tools you need to look cool in the IR chair.
Our department has been cutting back on costs. Is Equity Analysis affordable?
Equity Analysis is surprisingly affordable when compared to other IR services that may compete for your budget dollars. It’s built on software and databases rather than human analysis, so we can pass savings on to clients. We provide three tiers of service dependent on the frequency of analysis and the level of support you desire. What’s more, ModernIR likes to earn your business each month, so we do not lock our clients into a term agreement. Request a demo to learn more!
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. 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-one-ones when you’ve got five hours in New York and want to make the most of it.
How do we know whether to focus on value or growth investors?
Markets with significant liquidity pools and less high-frequency trading appeal more 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 will you help me use Equity Analysis?
At ModernIR, we pride ourselves on outstanding customer service. We don’t lock our customers into contract terms beyond one month, as we feel it’s important to earn your business each month.
We know it’s new thinking, a fresh IR concept that takes time to time to internalize. Depending on your needs and those of your management, we typically suggest our weekly service which includes Adobe Flash commentary and a scheduled weekly call to go over your Equity Analysis. 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. Our goal is to make you the resident market structure expert.
Like most anything, what you get out of it is commensurate with what you put into it, but we find most IRO’s gain confidence in the new terminology and data within two months. It’s a relatively small investment to make to establish yourself as the resident market-structure expert on the team.
How are contemporary trading markets different from capital markets of the past?
Through a wave of regulatory and technological changes over the past 15 years, today's capital markets have become complex rules-driven environments that function in nearly the opposite fashion that they did for the 200 or so years that followed the roots of the NYSE under the Buttonwood Tree in 1792. Once a simple auction place, they are now characterized by:
How to make sense of these competing forces? Equity Analysis helps you understand what types of market behaviors are setting your price.
What is the “maker/taker” model?
It describes the system of incentives adopted by all the major stock exchanges and approved by the SEC through which shares of stock trade today. In many instances, traders can sell shares, or “make” liquidity, at exchanges for incentive payments of around 25 cents per hundred shares. Buying shares, or “taking” liquidity, produces an offsetting charge (the reverse of this fee structure exists too, at, for instance, the Nasdaq-owned Boston Stock Exchange, where traders are paid to remove shares and charged to provide them), of perhaps a penny more – say 26 cents per hundred.
From the 1790s until fairly recently, exchanges charged a consistent fee regardless of the transaction. Why have markets moved to a fee structure that changes according to activity? The idea was that liquid markets for all securities were best for investors, and so a scheme was devised to ensure that shares for every security would be available whenever someone wanted to buy or sell.
The maker/taker model was created. The problem with this structure is that it gave birth to “high frequency trading,” or the constant movement of shares from point to point in order to capture “rebates,” or the fees paid to traders for making liquidity to complete trades. What’s more, trades predicated on fees for simply being present do not represent the real, or natural, price of shares. Thus as maker/taker liquidity has come to reflect 60-70% of trading volume as we see today, there is great value uncertainty in the prices of traded shares across the market-cap spectrum.
What is high-frequency trading?
In the simplest sense, it’s the rapid turnover of small amounts of shares to intermediate the orders of other market participants. Consider it machine order-shuffling for minute profit by market intermediaries who view themselves as liquidity providers. Driven by “maker/taker” incentives to trade across various platforms and exchanges, these intermediaries “take the other side” of the trade, often moving the same shares back and forth between exchanges, alternative trading systems, and brokers. Frequently, these machines commit to no more than a hundred shares per security at a time and attempt to end the day “flat,” or without any ownership at all, even after accounting for the largest share of daily volume.
What is algorithmic or program trading?
While “program trading” generally refers to computerized trading for a group of securities, and “algorithmic trading” refers to trading decisions made by computers using mathematical equations, in fact both are nearly synonymous today. In both cases, trading decisions incorporate instructions about price ranges, volume, comparative behaviors, the reactions of other participants, the costs and implications of trading decisions on the market and the portfolio of securities for which the trades are being executed, and macroeconomic data related to overall risk. Often, large or specialty broker-dealers execute these trades on behalf of their institutional trading clients, which may include rational/fundamental investors, risk managers and speculators.
A prime broker provides bundled services to significant participants in equity and other markets. When investment advisors register with the SEC, they must specify legal counsel and a prime broker. Prime brokerage typically includes trade executions, capital for completing trades, margin accounts, custodial and securities-clearing services and market-making. The largest investment banks dominate prime brokerage.
Why should I be concerned with what traders are doing?
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. 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 (this concept underpins exchange consolidation). These Reg NMS realities require IROs to understand trading in a way not necessary when the equity markets behaved differently.
How do options affect stock price movement?
Options are low-cost alternatives to buying equities, tradable securities in themselves, and an effective way to leverage returns from assets and hedge against risks. As in any asset market, be it real estate, cars or baseball teams, there is something valuable that can be leveraged and should be protected. Same in equity markets. Stocks are assets. Institutions today often attempt to leverage yield from assets rather than hold them for appreciation, because appreciation can’t be counted upon like it could in the past. In corollary fashion, assets are subject to greater risk of depreciation today, so institutions hedge risk. The well-informed investor-relations professional today must thus understand not just how company shares are valued by investors but how they’re used for risk-management or speculative purposes.
One of the best ways to observe these uses is to see what behaviors dominate during monthly options expirations and around index rebalances. By the same token, if risk-management and speculation dominate during options expirations or around index rebalances, contemporary IR pros will plan news and earnings around these dates rather than during them. We’ve created an IR planning calendar to help you plan around those times.
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.
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.
What is an 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.
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.
What is a 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.
What is a 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.
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.
Our weekly Market Structure Map provides unique insights — free — on trading markets, with an exclusive focus on helping investor-relations professionals keep cool in the IR chair.
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