Since CNBC's Santelli ranted on the floor of the Chicago Mercantile, arms outstretched, asking, "Is anybody in the government listening to markets?" we'll stop, and consider it validation for what we've said since October.
To our topic today, we've seen a curious trading phenomenon in certain thin small-caps. Here's how it works: speculators identify a stock that perhaps backs a low profile story. Launching their effort, they indicate sizeable interest via dark pools, apparently committing meaningful capital. Getting good deals because thin stocks don't move well in Regulation NMS markets, they now begin to buy and sell small increments in open markets and on multiple platforms – say, Archipelago, the CBOE, Instinet, Lime Brokerage, Interactive Brokers, and so on.
Say you're an institutional investor who's got an eye out for movement. Watching, you naturally conclude that someone's accumulating shares. You begin to buy. The trend looks good and the pricing is tight, so you buy more. Retail investors and day traders pick up the activity and follow along, and now the speculators with the supply are feeding it out in rapid-fire fashion.
Suddenly the speculators sell at market (not limit), overwhelming price and pushing it down and killing momentum. This whole process generally spans 4-7 trading days. The institutional buyer is flummoxed. What in the heck has just happened? Is it news? Forced selling? Meanwhile, the speculators…begin the process again. Maybe they victimize the unsuspecting institutional (or retail) investor all over, too.
We've seen this process play out on a number of occasions. We also believe that traders add index puts and calls and other derivatives that inversely correlate to the trading tactics, to increase returns. There's nothing directly illegal about it, though the ethics are at best questionable. They are taking advantage of market inefficiencies.
You conventional IR practitioners will be delighted to hear this: the lesson is that a consistent message and a disciplined outreach plan to retail and well-targeted institutional investors remains as important as ever. If you don't counter the activities of speculators through this committed application of IR strategy – not, mind, shrill reactions! – you're in effect validating speculators' accusations that you're a weak target worthy of manipulation.
And herein also is the reason why market structure analytics are indispensable too: it's the only way to observe and understand speculative tactics. Or to differentiate between the value rational investors place on your stock and how such things as index risk-management schemes and program trading baskets value it. Oftentimes and particularly now, they're not the same. By differentiating, you enhance your value in the IR chair, and you give your management team the ability to separate what investors think from how the markets – which they can't control – discount their equity or put untenable periodic premiums on it.
Margaret E. Wyrwas - Knight Capital Group, Inc. (Nasdaq: NITE)
Senior Managing Director, Corporate Communications & Investor Relations
Equity Analysis™ subscriber since March 2007
"In global markets driven by automation, changing market structure regulation and dynamic investment objectives, today's investor relations professionals require new data points in order to remain relevant and add value in their company's quest to reduce its cost of capital."
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