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Hope you enjoyed last week's hiatus from the Market Structure Map! I was traveling and couldn't convince anyone else to pen it in my stead.
In January, European markets set all-time records for derivatives trading. NYSE Euronext reported that its Liffe European options and futures business had a 61% increase compared to January 2007. NYSE also said its ETF volumes were up 144% in the same period.
If you saw curious trading on Valentine's Day and thought perhaps jilted lovers were the reason, more than likely it related to index options expirations midday on Feb 14. We heard no mention of expirations on any major media outlet, but the data are pretty telling: everything pointed to resets on options contracts and a corresponding shuffling of institutional shareholdings. If you can lever more from derivatives on fewer shares held, well…that translates to a better return on assets, doesn't it. Does this happen? Give me a portfolio manager looking for lower returns on assets and I'll show you a candidate for government office.
A little humor, there. Anyway, the burning IR questions are these: 1) How do you run an IR program when so much of what goes on relates to balances of assets and the insurance policies presented in the form of options and other derivatives? 2) If derivatives sunk the credit markets, why the heck are you suggesting that investors are using them more than ever?
Short answer to Question #1: We don't make the rules; we just report on them here and give our best effort to helping you help your shareholders. So don't report major news, don't engage in outreach and don't hold earnings calls—unless you've got bad news to report—when options expire or on the last day of trading in a month.
Short answer to Question #2: The problem wasn't in the derivatives per se, but in the mix of assets that were being insured—so to speak—with derivatives strategies. So in a weird sense, it's even more advantageous to hold fewer assets for shorter periods of time.
Is there ANY good news, you ask? This isn't bad news. In fact, you can exercise significant influence as an IRO when the bulk of order flow is automated and hedged. It's the rock rippling the stream concept. More on that next time. Stay tuned!
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