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With tax season expiring today (ah, for the original Constitutional language declaring that Congress shall impose no direct tax or capitation), and monthly ETF, index and equity options expiring tomorrow through Friday, let's talk data.
Last week, 40% of order flow in the sample pool executed on Electronic systems, up from about 32% in mid-January. The increase came through erosion at Speculative and Prime desks (these are trading systems, and banks helping institutional traders and investors manage execution and clearing). What's it mean, IROs, to the volume behind your stocks? Broadly speaking, it points straight to three items: a) institutional investors are picky now about Prime brokers, upon whom they count for leveraged capital and more; b) traders are speculating less in equities and more in commodities and other financial instruments (and they've got less leverage to use now, frankly); c) big institutional investors are trading more themselves, skipping brokers and tapping markets directly through systems like Lava Flow, EdgeTrade, Brass, BATS and Archipelago.
And fundamental investors? Contrary to popular media opinion, we observed more fundamental departures last week, not "bargain-hunting," as you'll hear every time there's a little bounce. Most recent upticks—perhaps all—reflect shifts in short-term trading tactics. Traders and conventional investors alike are finding that short-term trading means lower risks and better chances for returns—especially in our current credit quagmire. No matter how devoutly fund managers espouse bottom-up investing, they've got mortgages to pay too, and fundamentals are flimsy hooks in uncertain economies and equity markets turning on liquidity and speed. Like us, they adapt or go job-hunting.
What about options expirations this week? The ETF volatility measures expire on the 16th. Morning expiring stock and index options follow the 17th, and "P.M." contracts die the 18th. Watch your intraday volume accordingly for the wind-in the-trees notion of how traders and investors use these vehicles to manage risk. But keep in mind too, that most resetting occurred last week, and we think perhaps as early as the 7th this month, the farthest out we've seen marked activity in some time.
All we're saying, as always IROs, is that you must recognize the power of risk-management systems today. And avoid getting in their way with your overall IR strategy.
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