Market Structure Map

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

Apr 27-May 1: The Three Faces of Recent Trading

Speaking of news, to set up this week's email we're reminded of what the gallery owner said to the painter: "I have good news and bad news. The good news is that a fellow came in and asked if your paintings would increase in value if you died, and then proceeded to buy all of them. The bad news is he's your doctor."

Relax, we're predicting no deaths. We observe money's behavior, which is what it is, regardless of its merits. Three keys this week: a) retail investors stepped up; b) program trading likely reset positively May 4, signaling further gains for equities until next week ahead of options; and c) the new reality in equity markets is obscene levels of short-term trading.

Let's take each in turn. Retail activity has simmered and popped since at least February, but beginning April 28 it gained steam. We think retail folks with cash finally gave in to impatience and put money to work. That's great news. No matter the monumental power of institutions, self-directed investors are intrepid trailblazers. On the other hand, we saw more than one instance where proprietary traders including Goldman Sachs bet against them last week, dropping away as small traders picked up the baton of rising indices and carried it forward into May. We'll see who's right.

Second, program trading (see link below on NYSE developments), where massive trading plays out across baskets of securities according to a predetermined objective, apparently commenced May 4th in positive fashion for equities. That would be the third straight month, yet another strong signal for equity markets and something that frankly defies underlying business fundamentals. Where's the money coming from, we wonder?

Third, we used the word "obscene" to describe speculative trading, which we define as trading as an end unto itself, not for investment purposes. Across a spectrum of clientele, we noted skyrocketing day-trading, arbitrage, and other speculation. Bluntly, it's a form of greed that always has victims.

Meanwhile, volume from big Prime brokers is dominated by a handful – all of them major TARP recipients – while the category as a whole makes up only 20% of trading, the lowest we've noted since perhaps 2002. Speculative trading last week nearly doubled prime volumes. We've never seen anything like it.

Lessons, IR folks? In no universe subject to the five or maybe six senses with which most humans are equipped do these conditions constitute sustainable economics. So enjoy the ride, but recognize greed and impatience and don't be fooled into thinking that the rules don't apply anymore. Be confident, stay cool, and keep the feet of your management teams planted in reality.

NYSE Offering Predictive Trading Tools

 

Go to Market Structure Map index

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.

Subscribe via email |  RSS feed | See the archive >>