Market Structure Map

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

Mar 10-14: Why IROs Need to Meet Traders Too

We skip a week with the Market Structure Map and a venerable Prime goes under? That'll teach us.

Speaking of Bear Stearns, our purpose is to help IR folks understand the nature of today's markets-not to opine about the Street. But we wrote before about expecting a big failure, and how it would be good for the system to flush out detritus. We've long called Bear Stearns the Prime Broker for the Semi-Nefarious (just a little humor there) because of its deliberate focus on serving aggressive hedge funds. It's only an opinion and we could be wrong, but we think the problem for Bear was its book, not its balance sheet per se. After all, JP Morgan Chase was far more exposed to subprime mortgages than was Bear Stearns.

Everybody operates in silos and we stand in a tall data tower here. But we've been saying that other Primes including Deutsche Bank, Goldman, Jefferies & Co. and Lehman Brothers have been eroding Bear's hedge-fund prime brokerage business for months. We also observed increased algorithmic trading at JP Morgan beginning about six weeks ago. The point is that banks are only as valuable as their clients. If your clients are leaving and the ones remaining are overextended on your credit and now not paying bills...you have problems. So we look next for some major hedge-fund failures.

Investor-relations lessons to be learned? It would be wise for you to understand the general nature of trading operations at your key sellside equity research allies. When you visit them, ask to see the trading floor. Ready a few questions for traders too, like "how much of our volume is ETF-related?" And "when you're working institutional orders, what percent is for stock pickers versus asset-allocation investors?"

Why would you do that? Two main reasons: to learn about how your stock trades, and to stow away facts about this firm's clients. If they're doing more asset-allocation business, maybe it's less important to spend precious executive time there...but maybe you want to talk with the analyst or plot investor introductions in the two weeks before options expirations, because volume from portfolio asset/insurance rebalances may give their fundamental clients better reason and more liquidity for getting into your stock.

Speaking of options, tomorrow (the 19th) marks quad-witching, curiously occupying midweek thanks to the market holiday this coming Friday. Messy recent markets to us reflect pre-expirations trading. And we continue to think it no coincidence that Fed rate cuts always come ahead of expirations. We can't help but infer, then, that leverage out there is massive and prime brokerage clients are...strapped.

So next week's trading will give us the real measure of investor sentiment. If the markets are up, we're probably okay. If not...we'll meet you on the dock at Kaimbu Island, way away from the maelstrom.

Just kidding!

 

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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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