Before we get to program-trading resets and why you should care about them, IR folks and execs reporting to shareholders and boards, have you looked at your "liquidity fundamentals" lately? They're way less accounting-department nasty than the phrase suggests.
"Liquidity fundamentals" is our phrase for average trades per day, average dollars per trade, and average daily dollar volume. They're a quick read on your equity-markets health and appeal to institutional investors. It would be interesting to see liquidity fundamentals for broad market measures.
For instance, in January this year, Nasdaq Composite volume averaged 2.6 billion shares daily. February's dropped to 2.3 billion; March, to 2.2 billion, and April showed 1.9 billion shares traded daily. That's a 27% overall decline year-to-date. Recent market appreciation, all occurring from March 14 after currency options expirations, through May 5, a period of 36 trading days, reflects average Nasdaq daily volume of just two billion shares. Hear anybody talking about it? Naw, us either.
This matters because money—not news, hunches, opinion, theories or goofy politics—is the measure of sentiment. And money isn't flowing freely into US equities. It's still out there chasing commodities and derivatives and Lord knows what else, no matter pundit pronouncements of "turning the corner" or "renewed investor enthusiasm." So IR folks and execs, keep expectations in check regarding investor reactions to strong reported operating results or furious, uber-outreach to institutional forces.
Lest you say, "Quast, must you throw a wet blanket on every happy moment?" No, we're upbeat folks here at ModernIR. But we try to keep it real.
Which brings us to program-trading resets. Used to be you could mark your calendars on the third or fourth trading day of each month for adjustments to equity algorithms and broad baskets run by big firms behind indexed and asset-allocation models. We've theorized that it used to take a few days for computer programmers to enter data and fire up the hydrogen-powered Equity Markets Hygromenator.
Now for the second month running, we've observed program trading resets occurring instantaneously with month-to-month transitions, and even slightly before. Data from 4/28-5/2 shows programs resetting 4/30, with full effects on 5/1. If your stock experienced significant swings on either of those days with no supporting news or information, chalk it up to gigantic asset-allocation models.
We think these changes are partly due to better and faster data-generation capabilities available to both Prime brokers and institutional trading desks. And partly it's globalization of equity trading, a condition that will only intensify as all that newfound wealth from Angola (sovereign wealth fund up 84% in 2007), to Nigeria (sovereign wealth fund up 291% in 2007 leading growth among all SWFs), to the trillion-dollar funds in the United Arab Emirates cities of Abu Dhabi and Dubai commences serious matriculation in Lehman and Goldman and Morgan Stanley and Citigroup (et al) algorithms.
Just things modern IROs and execs of public companies need to grasp.
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."
