Lest you grow weary of hearing about options expirations, we’ll say only that trading last week (June 16-20) reflected little fundamental investment and lots of speculation, with expirations running Monday (S&P 500 long-dated) through Friday (p.m. stock and index futures). It was a Rugby scrum back there behind the data. Goldman’s SigmaX dark pool traded more issues than its agency desk (due to algorithms hitting liquidity pools) and so did Citigroup’s automated market maker, formerly called Automated Trading Desk. Electronic order flow –automatically matched buying and selling – dominated. The big Primes dropped to the lowest level of the quarter, it appeared to us, which reflects how direct-access trading by speculators was the big force. What were they doing? We think lots of folks were just adjusting equity assets while gambling in derivatives and commodities.
And there’s one more curious thing in the order flow: the role of European banks ranging from UBS to Deutsche Bank to BNP Paribas is up markedly in 2008 and continues to grow. These shops are almost certainly securing a sizeable share of the new wealth in Mideast sovereign funds.
With that, let’s shift to another topic: the role of regional independent broker-dealers. We include in this group a great number of smaller firms ranging from Raymond James to Maxim Group (yup, we know the latter is a research and trading shop much different from Ray-Jay). How should you view these sellside relationships when, say, Lehman Brothers trades 200,000 shares of your stock per day and Raymond James maybe 3,000 shares? Here’s the little-known secret: Raymond James actually routes 5% of its trading in Nasdaq issues to…Lehman. Another 60% divides up among Citigroup, Citadel Derivatives, Knight Securities and UBS. So these “footprints” at Raymond James are key indicators of trading predicated on rational thought. They’re the movement of the leaves in the trees that tells you which way the wind is blowing.
Alas, sending order flow to other broker-dealers isn’t a great way to generate profits, and these regional firms will likely be gobbled up by the big commercial banks at some point. But keep them in your sellside outreach plan, because they’re important, and better, barometers of rational thought in many ways than the big banks that simply run the machines behind 70% of the order flow now.
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."
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