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Welcome back! Oh wait. We’re the ones back – from NIRI National. Should you wonder why we’ve just returned when the conference concluded last week, here’s a lesson learned: hitch-hiking makes a poor corporate travel plan.
Only kidding. Before we talk market structure, we’ll recap NIRI: We found the annual IR rendezvous, this year themed “Ahead of the Curve: Getting There, Staying There,” well-attended (circa 1,500 on hand), the facilities at the Grand Lakes Orlando Resort more than accommodating, the weather mild for central Florida in June and the content advancing a step anyway toward today’s market realities.
Notably, the CEOs of both the Nasdaq and the NYSE talked about proliferating trading systems, strategies and asset-class mixes, and the challenges these capital-markets factors now present to IROs attempting to understand the nature of stock-performance. That both CEOs highlighted them should be telling.
It was the sophomore year for the ModernIR booth (see our market structure brochure). We observed a marked change in how IR folks responded to our market-structure software and database systems, particularly with the bigger “early adopters,” who perhaps are finding that old tools aren’t correctly answering questions amid new Reg NMS marketplace rules. Last year we were still too far, um, ahead of the curve.
To June’s market structure now, we observed three key drivers: First, from 5/29-6/1 Prime brokers including Bear Stearns (which we know runs sophisticated Russell reconstitution strategies in its Global Clearing Services division) dominated order flow. Then Speculative volume jumped and retail liquidity pools were active (the latter often signals short-selling because speculators find shares there to borrow). And then Electronic order flow (the natural market, automated order-matching) assumed the lead.
What to conclude? Electronic order flow is presently pressuring prices on average, telling us that some real money is leaving. Second, neither fundamental nor quantitative capital is being committed consistently by algorithm, leaving the markets to short-term speculators and real money with no good liquidity entry points. These conditions prevailed in March until Primes regained control, if you’ll recall.
Frankly, we think there’s a lot of derivatives trading going on right now (leveraged against equities), though the evidence is but inferential.
What to do, IROs? In highly speculative markets, don’t waste energy on outreach to new investors, because even a resonating story may encounter unacceptable trading economics at the execution desk (we’ll talk about the effects of trading costs on investors’ decisions soon). Instead, focus on existing core-value shareholders who buy dips. And be patient.
If your stock’s up despite the alpha seekers – congratulations!
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