Last week (4/14-18) gave us dwellers at the Sierra foothills a batch of chilly coastal air and dragged the equity markets through a gaggle of monthly options expirations (as most of you know who read here regularly) and the first wave of Q107 earnings reports.
In our order-flow sample pool, Speculative volume unsurprisingly jumped to levels not seen since January, with Primes among those giving up room to speculators. Evidence of fundamental investment was the weakest of our order-flow categories, at a mere 2.1% of total. What's that mean to you in simple terms, Investor Relations Officers? Fundamental investors remain sidelined. Short-term trading dominated. Program trading in equities was anemic. Conclusions? If nothing more, we hope these observations help you set realistic expectations for your management teams.
Speaking of realities, volatility is an equity fixture today, and will remain so as long as the growth of vehicles designed to capitalize on it continues (mind you, we need no government solution…over time and via the Efficient Markets Theory gaps become a number approaching zero and the impetus for pursuing them evaporates, fostering again a focus on fundamental investment).
One example: Contracts For Difference, known among traders as "CFDs." Let's talk a bit about them today, simply so you'll be aware of them and their potential effects on equity prices. In brief, CFDs are margin-traded contracts linked to underlying share prices of issues comprising the contract. The users don't actually buy or sell shares, but promise to pay the difference between the current asset value of the contract and its value at contract time. In other words, the opportunity for gain has less to do with the value of equities than the spread between different securities or the spread between prices at the beginning of the contract and at its conclusion.
Plus, since there are no shares actually held, CFDs give traders enormous leverage capabilities. A CFD may theoretically consist of any mix of prices and securities, and CFDs are available on the stocks or shares of companies comprising the FTSE 350, in the UK, the S & P 500, Dow Jones and Nasdaq 100 in the USA and most of the major continental European companies. This fits perfectly with growing global derivatives trading and the challenge of accessing liquidity. What are their effects on your equity? For one, they may mean lower real investment dollars flowing into your stock—and more going into commodities and other short-term opportunities. Or for activities likes those that hurt UBS so badly—buying collateralized debt obligations to carry as assets and leveraging those assets for currency trading (carry trading) to capitalize on cost spreads relative to various currencies. This works as long as the value of assets remains predictable.
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."
