Equity AnalysisTestimonialsRequest a DemoEvents & ArticlesMarket Structure Map
Ironically, it's very windy today in Denver as the president consigns a huge lump of present debt to future generations, something Thomas Jefferson described as "immoral."
Also, alert reader Pam Murphy of Incyte Corp called about last week's issue of The Map on high-frequency trading and said: "I don't believe that only 15% of order flow is driven by rational thought. What about all the activity in investment portfolios predicated on allocations, where analysts and portfolio managers deliberate and select a set of companies to own?"
Great point, Pam. Answer: Asset-allocation order flow like that, which is often rebalancing activity, is in current markets a function of risk management. Buy/sell decisions are more about math than human insight. It shows up in program trading and works this way: Healthcare holdings up by 3% in the past week? Take a little profit to decrease risk exposure, and put some money into yield-producing securities (typically a form of credit or index derivative). This continuous tweaking with levers is common now because values are uncertain and timeframes thus are short and distinct.
One more thing: we're smack in the middle of options expirations. Risk counterparty contracts expiring tomorrow through Friday likely were written with passage of legislative stimulus (what we prefer to call "legislative pestilence") factored into values. The result? I'm reminded of a scene from one of Cormac McCarthy's brilliant western novels where a character is asking another how "rocky mountain oysters" taste. "About like you'd expect," is the reply. The same could be said of today's trading.
Now, to the key topic, these budding sources of liquidity at NYSE Euronext, and what the change means to understanding your trading, IROs and execs. We wrote last week on how the big US exchanges are both offering incentives for broker dealers to offer more shares for sale. NYSE Euronext plans to begin a pilot program next month for what it's calling Supplement Liquidity Providers, with an initial 500 very actively traded issues. The plan is to pay these SLP broker-dealers 15 cents per 100 shares offered up if they maintain the best national bid and offer in their assigned securities for at least 5% of the trading day.
The SLPs will be competing with Designated Market Makers, formerly the specialists, who receive even better deals for furnishing liquidity (30 cents per 100), but must also make the best market 10% of the time in highly active issues and 5% of the time in the rest.
By having SLPs and DMMs compete with each other, the notion is that more prices should be quoted, which should narrow spreads and improve pricing for consumers of liquidity, a good thing for both investors and shareholders.
Will it work? There's considerable interest from high-frequency traders, we've noted, and crack algorithmic shops like Knight Capital Group plan to become part of the SLP program. We're very curious to see the effects on clients' equity markets.
Here's the CRUCIAL takeaway, IROs: right now, insight into NYSE trading is frankly suboptimal. Massive amounts of volume trade away from the NYSE. If the NYSE shows order flow crossing the SLP and DMM desks (not who's on the other side. That's against the law, and completely unnecessary to the IR job to boot), it could be a big improvement in your efforts to understand risk-management, speculation, and rational investing behind your price.
What can you do if you're an NYSE IRO? Make sure you voice your desire to see the broker-dealers executing order flow, especially these new SLPs and DMMs.
Go to Market Structure Map index
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.
Subscribe via email | 
RSS feed | See the archive >>
RSS feed