Market Structure Map

Helping IROs understand short-term market structure to maintain long-term peace of mind.

June 29-July 6—Why Should IROs Care About Market Structure?

Before we touch today's theme, a word on turning the corner from Q1 to Q2 on the calendar:

1) Primes did not dominate Friday order flow on July 6 (Electronic execution led the pack), the first such occurrence in awhile, indicating to us that quant buysiders throttled back in the new quarter. 2) And BIDS Trading LP, the alternative platform launched by a half-dozen Primes to provide wholesale block order flow to institutions and liquidity to the sellside (under a sponsorship model—I can explain if you like) had its first order flow in our sample group. BIDS stands for Block Interest Discovery System. Ironically, Friday's first activity wasn't block volume. Demand for liquidity as execution speeds keep accelerating is crazy.

Speaking of crazy, is it nuts for IROs to know market structure goop like the advent of BIDS Trading and whether Prime brokers controlled liquidity as the first week of Q2 trading concluded? Case in point: "Tim," an IR officer lamented last week as we finished a demo, "this trading crap is making my head hurt." The IRO conceded, "Intuitively, I don't think I'm getting accurate information from my surveillance provider, and at times our stock just dumfounds me and defies logic."

Call me biased but my silent reaction was, "Then how come you're paying those high surveillance dollars? Throw us a bone!" Just kidding…and no offense to the Empire (you know who you are). Back to the point: "Trading crap makes my head hurt, so why should I do it?"

I probably got ahead of myself with the IRO, leaping past the way market structure shows how and why a stock behaves the way it does and whether or not the active buyside will in fact buy it, and galloping prematurely into how IROs can measure activity, prioritize actions and manage equity currency like a Fed chairman.

But Market Structure knowledge isn't "trading crap," it's a necessary element of conducting IR activities in global, electronic equity markets. Here's an analogy—and you Adam Smith'ers out there (I'm one) be silent: What if the Federal Reserve ignored the money supply? Or what if you never adjusted your foot on the throttle of your auto when terrain steepened or fell away? It's not that the economy would collapse or that you'd fail to reach your destination, but rather, that the routes for both would be decidedly less predictable and pleasant.

One more example: you don't have to hold an earnings call. It's not required by regulation. But it's the practice of the public equity markets culture, and most do. Well, that culture today involves arbitrage, derivatives, alternate trading systems and myriad other matters that have fundamentally and forever changed the behavior of the sellside and buyside. So no, it's not necessary to understand your market structure. But IR life will be decidedly less predictable and pleasant if you do, and you may find yourself on the fringe of your culture. So to speak.

 

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Market Structure Map

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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