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We're constantly refraining the three reasons why market structure matters to IROs—right answers to questions, right places for IR time and effort, right IR measurements. Today, let's apply options expirations to these hooks.
Last Friday marked monthly options expirations, and we noticed that market structure on the whole changed in advance on Monday October 15. Did you also see how European, Asian and American markets behaved like pistons, going up and down in small increments? Pundits would have us believe these swings are manifestations of fear and greed tied to credit or economic concerns. Whether investors are engaged in continual bipolar reaction or not, we don't think this explanation passes the smell test.
Why does it matter to you, IROs? Because it's important to understand the behavior of your shareholders—both long-term and short-term—if you're to accurately answer questions, effectively expend effort and correctly measure results. Poring over data as we do, here's what we think: Regulation National Market System in the U.S. markets has propelled the search for arbitrage beyond individual market centers onto the global stage (it's not fully possible yet, but the data tell us it's getting easier). This is no surprise. But the degree to which volume sloshes among big American broker-dealers, and big European broker-dealers and Asian structured-products specialists is quite remarkable.
And no matter what traders may say at turret level, options expirations are like Santa Ana winds for equity values these days. Derivatives are highly liquid and constantly in motion. Still, swings of a percent or two each day played out over a year…the opportunity for gains—and losses—is both alluring to investors and difficult to quantify. It's not 5-10% at a whack, but little bits done fast and continuously. These features impact availability of liquidity to fundamental investors, and the transactional nature of equity markets reshuffles sellside priorities.
If you want to be an IR star these days, you need to know this stuff. So to conclude, let's go back to our beginning three hooks: Did your stock respond to news or events—or to a derivatives imbalance? That goes to correct answers. Which sellside shops affected your stock price, and when? That addresses how and where, and even when, you spend your IR time. How did money—not volume—respond to your calls and one-on-ones? This goes to measuring your IR activities.
The truth isn't in market structure alone, but if you don't know yours, you're taking big chances with all three hooks.
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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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