The Nasdaq Composite and Dow Jones indices both abruptly changed courses April 21-22, reversing gains the three preceding days during monthly options expirations. Related to the end of another expirations period? Or the equity markets impact of New York Giants quarterback Eli Manning tying the knot in Mexico on April 21?
Whatever the case, we do know that by April 23 signs of transition management emerged. What is it? JP Morgan calls it "supporting institutional investors through structural changes to achieve desired portfolio exposure in a timely, risk-controlled and cost-effective manner." The bank highlights how transition management helps institutions maintain portfolio exposure during asset reallocations, preserve asset value, reduce risk through outsourcing operational burden, reduce timing risks by centralizing rebalancing efforts, and source efficient liquidity at minimized cost. JP Morgan specifically notes how "unwanted risks are hedged using derivatives such as futures and ETFs where appropriate."
Lest we cause narcolepsy, IR folks, it's just this: institutional investors of both quantitative and fundamental varieties oftentimes now adjust portfolios to balance assets and associated risks. If you happen to be talking about your business right then, well, it may matter less. This was very evident last week. And it's been our experience since July 2007 too, that risk management is more pronounced ahead of Fed Open Market Committee meetings. The FOMC convenes tomorrow.
So that stuff's not surprising. Here's what is, however: increasingly, we're seeing order flow during transition-management hit alternative trading systems—The Nasdaq's ADF (which simply displays pricing and order flow executing on a suite of ATS's), The International Securities Exchange, the National Stock Exchange, Knight's EdgeTrade (which, like Bats Trading, has filed an application to become an exchange), LATS (Lehman's alternative automated platform), EBX (the Level ATS trading system created by Citi, Fidelity, Lehman Brothers, Credit Suisse and Merrill Lynch); Instinet, owned by Nomura; and Archipelago (owned by the NYSE).
These automated trading systems, tapped with front-end and back-end order-management and execution-management technology, offer a collective phantasm of algorithmic sophistication that simply boggles the mind—and obscures the sources. It's also hard on the prime-brokerage business model because we believe institutions are driving more themselves, without help from banks whose lending capabilities rest on questionable assets.
All of today's goop about trading and investor relations can be boiled down to one lesson: do not confuse reactions to news, earnings and other announcements with monthly portfolio rebalancing. And while knowing who precisely drives it is hard, the evidence of its occurrence—the wind in the trees –is easy to see.
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."
