Market Structure Map

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

Aug 13-17—Fed Resets Rates But Not Reality

Last week's actions at the Federal Reserve and foot-soldiering primary dealers underscore, IROs, why it pays to understand market structure.

We know the Fed changed its discount rate (the cost of borrowing capital from the Fed) and in effect opened all the teller windows. We also know from the Wall Street Journal and other news outlets that several big Prime brokers met with Fed folks and helped form a plan for the liquidity crisis that began filleting real investor flesh and gristle on August 13 (not just the flotsam and jetsam of subprime excess).

Our broad brushstroke of order flow by category (we parsed a record 780 million shares of order flow last week) showed surging Prime activity on August 15 at JP Morgan in particular, and at Citigroup, Goldman Sachs and Bank of America, all key banks that discussed the problem with Fed and clearing-house representatives.

We also saw the highest level of derivatives-driven equity trading that perhaps we've ever seen across the board on August 16-17. We remind you, IROs, that we first observed fractures in the equity markets breaking in step with options expirations on July 20. Options expired again on August 17. Coincidence that the Fed and big Primes acted just beforehand? We don't think so.

We also believe that the fundamental order-flow issue—in our view, better technology at high-frequency traders than at algorithmic systems relying on historical terabyte databases—remains. As much as the credit crisis may trouble markets (to us infusing capital risks later inflation), the downside risk that concerned the Fed is in our opinion just as much about a failure in quantitative black-box strategies to find firm risk-management footing. Conclusion? It's not over yet.

Still, we're not here to commentate on market economics but to help you understand your market structure specifically and in context of the big picture, and to know why actions of specific trading desks—which control all equity entries and departures—are crucial to a modern, well-informed investor relations program. By the way, we note that the Nasdaq now emphasizes understanding executed order flow and Britain's fine Economist Magazine stressed in an August 9 article the relationship between prime brokerage activities and understanding market realities.

 

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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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