Equity AnalysisTestimonialsRequest a DemoEvents & ArticlesMarket Structure Map
Two Fridays running now, quantitative events have set market-structure tone. On the 15th, 2007's second triple-witching session (March 16th was first) marking the expiration of index and equity options and futures also coincided with short-interest benchmarking at the Nasdaq. And after summer solstice on the 21st officially kicked off summer and a gradual shortening of days, Friday the 22nd metered the final Russell 3000 reconstitution (the largest three thousand firms by market capitalization).
Electronic trading expert ITG, long an algorithmic player around reconstitution, projected historic lows for additions/deletions in 2007 of 187 and 145, respectively. Changes to rebalancing processes in recent years such as quarterly inclusion of IPOs and 5% market-capitalization bands around crossover points between the Russell 1000, 2000 and 3000 has reduced additions/deletions arbitrage returns. ITG also noted that capital of $408 billion at December 2006 reflected declines in monies pegged to the smaller two thousand companies (we can offer a reason why too…but another time).
So the markets yawned this year? Hardly. We observed a massive shifting of shares primarily at a half-dozen prime brokers led by Lehman (and not the agency desk), BofA, Goldman and Citigroup in particular. We also saw interesting, and perhaps offsetting, program trading in days leading up to the 6/22 lock-in. More intriguing still, equity trading rose for a few days at market centers better known for options execution, including the Chicago Stock Exchange, the International Securities Exchange and the Philadelphia Stock Exchange.
We've mentioned before how high-frequency hedge-fund traders like Millennium and Renaissance developed strategies in which equities might change little if any in price (and might even decline), yet which underpinned eye-popping annualized returns through complicated mathematical arbitrage. We know the Nasdaq hopes to acquire the Philly Exchange for its lucrative and frenetic options business.
Conclusions, IROs? To paraphrase southern singer and fiddler Charlie Daniels, there are things out there in the woolly derivatives swamp to curl your proverbial toenails, because they're beyond IR reach and influence. At least for now. But you've got to know the effects. Why? To preserve sanity, for one. And because all the investor outreach in the world won't produce returns if any uptick triggers automated and offsetting puts or calls that collar equity upside or downside. You think we're joking? Nope. We see these modern equity markets features frequently reflected in various issuers' order flow.
There is good news, IROs. Catalysts still rule and cash remains crowned and jeweled. Solid business plans backed by operational execution will compel rational investors to pay what's needed to reset those hedges. And then you're back in business—so to speak. You'll need a view of your market structure, however, to be part of that management-table process.
Go to Market Structure Map index
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.
Subscribe via email | 
RSS feed | See the archive >>
RSS feed