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We'd love to say that trading data tell us the equity world is well again. Alas, summer sneezes persist, albeit with fewer Kleenexes piled around the refuse bin.
Dropping silly metaphors, order flow last week was much like the week of Aug 6-10, though Electronic anonymous order-matching swapped places with Prime brokerage. And we absolutely saw real investors back on 8/21, but losing confidence and control by 8/23.
What's this mean, IROs? Well, Sellside Conference Season 2007 commences, and unless quantitative systems have figured out how to reset their risk-management algorithms, outreach to fundamental investors is bound to be largely fruitless. Why? Because value investors need bargains and growth investors need appreciation. When speculators control liquidity, opportunities for either one are limited.
Here's an important point to understand, IROs: There's a difference between the systems employed by quantitative conventional and hedge funds (both use long/short, paired, basket and derivatives tactics) predicated on complex mathematical manipulation of historical data, and trading platforms working off real-time and millisecond changes. When historical quants are successfully managing risk with their models, real-time high-frequency traders are confined to a small portion of free-moving liquidity.
For instance, as big a trader as Octeg is, if Morgan Stanley, Bear Stearns, Credit Suisse, UBS, Lehman, Goldman, Citigroup and Deutsche Bank have smoothly operating programs at work in the markets, it's impossible for Octeg and its clients and ilk to snap the big whip of volatility. But since the derivatives debacle in July, both buyside and sellside risk-management mathematics haven't been adding up. In the past few weeks, we've seen some amazing equity-markets features, including instances where fundamental investors who would normally respond to news—for some really big companies too –could not compete with the overpowering presence of real-time traders.
IROs, these are facts of modern investor relations. And we here at ModernIR believe we're about to undergo another buyside sea change. Historical quants failed this summer. That's a confidence crisis. What's it mean for the autumn? We have ideas, and we'll keep you posted. We hope you'll do your part too and cozy up to market structure, so both you and your management team can walk confidently in any valley of long IR shadows that may lie ahead.
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