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IROs, it's wise practice now to understand your stock performance before and after monthly options expirations (July 20 marked the passing of the most recent set).
You might even reconsider the notion of reporting quarterly earnings during weeks when options expire (3rd Friday of the month typically, but not always—you can check a calendar at, say, the Options Industry Council). Why? If you want investors' dollars oriented around your equity rather than the juicy gaps that may develop between it and the panoply of alpha opportunities available in currency derivatives (against your debt costs or your industry's average cost of capital—who knows?), credit derivatives, puts and calls on peer-group stocks or wildly unrelated ones, puts and calls on Exchange Traded Funds and indices…on it goes…then make the timeframe a bit riskier for them. Or wait till after options expire.
The great competitive differentiator in the trading markets now on the sellside is the coterie of Ph.D.'s assembled to offer the buyside sophisticated solutions to these puzzles in simple enough fashion that the buyside need then only press the button, so to speak (we live in an age of drugs in place of a little self-discipline for every whim or will, and "easy buttons" for investing strategies). Why make it easier, right? A humorous thought, and yet one worth considering.
What about this week's big Dow pullback and derivatives strategies? Any relationship? Hard to say. We did observe two compelling—and surprising—facts in our order-flow dataset. First, after Goldman led another marketwide shift around July 12th, Prime order flow stabilized and has stayed largely level. But that huge algorithmic wave we talked about last week (on the Alternative Display Facility) dropped, as did algorithmic trading on the whole. And second, while Primes led all other categories overall (suggesting machine-driven order-flow execution), the swing between Prime and Electronic order from Monday to Friday was huge—more than 10 percentage points. Did we have an equity liquidity crisis which we're feeling now, because systems over-compensated with derivatives strategies and had to adjust equity holdings? Possible.
Bottom line, IROs, it's important to know more than what you hear on the news about why public equities are so volatile in today's markets. Often there are clear, data-supported answers specific to your equity. And sometimes it's a mystery.
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