Market Structure Map

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

Oct 22-26—Evaluating Your Stock's Downside Risk in Rugged Markets

Boo! That's our token nod to All Hallow's Eve on the morrow.

Speaking of fear, do you try to quantify downside risk in your stock resulting from either marketwide technical shifts or specific Street disappointment? (By the way, we're not saying soaring oil futures, gilded gold prices and the sudden cachet of commodities traders should fill you with nameless dread. Nor or we saying they shouldn't.)

Anyway. Let's continue. Benchmarking potential price pressure once was fairly simple: Miss your number by 5% and you might see 20 points of price slippage based on multiples in models and the bias toward growth or value among your holders. But when 65% of volume churns through quant models and trading systems and ETFs—conditions we observed in our internal data pool last week—is there any way to estimate the size of potential divots in the road ahead?

We'll be the first to say it's not easy. But we can also tell you that it's emphatically not about the nature of your holders alone. You could have a bad quarter and if traders are vested in derivatives or variance swaps to capture volatility, your stock might have an artificially tepid response followed by quick recovery—leading you to conclude that investors are okay with results when in fact speculators are simply creating the equivalent of a forward avalanche—a hollow pocket supporting big impending changes in models.

Here's what you can do: First, determine which core broker-dealers drive the bulk of algorithmic order flow. UBS? Credit Suisse? Bear Stearns? Merrill Lynch? The banks behind steady volume are key to assessing risk. They may regularly perform similar functions for crossover clients—but they ALSO distinguish themselves in particular ways. If you've got big derivatives-oriented order flow behind your volume, your stock will behave differently than it will if shorter-term traders like Goldman Sachs are at work.

Seeing this activity can be the difference between telling management "I have no idea," and saying, "We think the market won't respond much at first, but we're likely to go into a prolonged slide after options because all these derivatives strategies will reset lower. Therefore, we're going to retool our message to highlight core value drivers and concentrate our effort over the next quarter on long-term value investors."

Which would you prefer?

There's much more to this whole market structure thing. But I still have to bulk up on Halloween candy. Enjoy the festivities!

 

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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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