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Monday marked the 131st anniversary of the Battle of the Little Bighorn but no Custers or Crazy Horses rode pell-mell through the equity markets. If anything, we saw evidence of the iron-fisted cost controls at work on the buyside, where brokerage relationships are shrinking and cost analysis, more and more, keys trading decisions.
In the past, we might have seen heightened arbitrage on a Monday following Russell reconstitution; instead, Primes—the big program traders—retained firm command. IROs, if your intraday spreads were greater that day, credit quantitative shuffling and shifting, with shares at both high-frequency hedge funds and index models seeming to move within the family (say, from growth to value) rather than out the door. We surmise so on the basis if high crossing activity within a small group of Prime brokers.
We did see increased arbitrage on the 26th, with Speculative volume back above 25% of the total—but still trailing levels we were seeing just a couple months ago. Wither the speculators? Well, they're still around. But with Primes expanding suites of services and means for tapping liquidity pools (electronic trading really fractures liquidity pools), gaming alpha is getting tricky. Case in point: Citigroup today bought Automated Trading Desk—the old Mount Pleasant Brokerage and an electronic limit-order pioneer. We've long watched their two key desks as proxies for middle-market broker-dealer order flow of both electronic and algorithmic (that is, packaged trading solutions or structured products) types.
The smaller sellside firms can't invest like the big guys and keep up. So the ATDs of the world enabled them to compete—but there goes the neighborhood. And for Citigroup, ATD's 120 broker-dealer clients are a pipeline to liquidity. Juxtapose that with Citigroup's recent acquisition of TD Waterhouse's capital-markets unit, and it's further proof to us of the need for ever more liquidity to feed the electronic machine.
What's this goop mean to the modern practice of investor relations? It's not complicated once you get comfortable with these new market realities. If you want results from investor outreach, you must factor in your market structure. Is it driven by arbitrage? Is liquidity coming from middle-market sellside firms? High-frequency hedge funds? How do other desks respond when a rational trading desk executes outsized order flow? Once you know these features of your equity market, you'll be amazed at how well you understand what the heck is going on. And how you can measure outreach and prioritize it for best results.
Hang the flags out Wednesday! We're heating up in norcal—expecting July 4 temperatures of about 104—out of sheer anticipation.
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