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We'll concentrate today on what happened last week when the markets were shelled by broad-based institutional selling. In our sample data, anonymous electronic order flow accounted for 42% of all trading Nov 5-9, and an astonishing 69% of volume on Nov 8.
What happened, why does it matter, and what's to be learned, IROs?
Looking first at what happened, we believe institutions abandoned the orderliness of prime brokerage relationships—broker-dealers employing technology, access to liquidity and their own capital to control execution costs for clients and effect minimal impact on market structure—and connected directly to the markets in a nearly desperate effort to reduce exposure to equities. Whatever the case, the astounding role of anonymous execution platforms like Archipelago on Nov 8 was indisputable.
Why did it happen? Two reasons: First, fear, plain and simple. Quantitative and fundamental investors alike are trading in four- or five-day increments and making swift changes. Second, options set to expire this Friday, Nov 16 include currency and treasury futures as well as security futures. With a maelstrom of factors ranging from concerns about the real impact of credit issues, to currency disparities, to geopolitical mayhem potentially rendering forward risk-management derivatives wildly out of whack versus underlying assets, institutions pared back the asset base. By forcing down stock prices through the simple act of selling, forward risks were alleviated because leverage relative to puts and calls ratcheted down. Interestingly, the REAL quad-witching next month on December 21 won't include currency and treasury futures because they expire on Dec 14. So we had an unusual day in November—but a telling one.
Why do these things matter, IROs? Because the chaos potential inherent in the equity markets' great fascination with leverage these days may render fundamental factors like solid financial performance, new-product introductions, and whole-honed investor messaging impotent. Then you're stuck explaining to management why your stock traveled the opposite direction of all your effort.
In short, today you need to know about these matters, and prepare to help marketing and operations teams adjust their timetables for better results from efforts. Sorry folks, as the old saying goes "it is what it is."
One last note: a debate rages about whether economic or market peril looms. We do not deign to claim any expertise in economic data. We just look at trading data, because it's the ultimate measure of investor sentiment. Pundits are reactionaries, while algorithms are real-time reflections of the mindset of the people behind them. We continue to have concerns about the role of short-term tactics in the markets—and the correlating risk to underlying equities if those hedges must suddenly and radically be reset.
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