We celebrated the USA’s birthday at 9,000 feet in Vail, where fireworks fit for a stout Vail Village budget showered and boomed at length and in panoply from Gold Peak under a bright moon. The mountains were enriched this year by heavy snow and late rains, so streams are cascading still and the trailside grass waves waist high, dappled by flowers. Hard to leave it behind!
Anyway, we promised last week to review why market structure is an IR must today and how it differs from other guideposts along the strait IR path. For starters, see the Bloomberg clip linked below, with Joe Saluzzi, one of our great market panelists at NIRI National last month and an advocate for understanding modern markets.
For segue, we say you should pay attention to speculators, which right off sets us apart. You can’t change their behavior, but you can sure watch them like a bobber on a fishing line. If something lurks, the first ones to know generally are speculators. It’s what they do – root out alchemies. Why does that matter, IROs? Because money doesn’t lie. If you pulled a Joe Biden at a conference, the speculators will let us know – which sure beats guessing.
Next in market structure is how asset managers behave. A lot of programmed volume comes from rebalances to portfolios, mutual funds, exchange-traded funds, the proxies for exchange-traded notes, even the asset components of big counterparty swap agreements floating in equity markets like the tips of icebergs. It has more to do with portfolio risk than company stories. Translation: shifts in this risk-management order flow aren’t about you. So knowing, you can buffer your management team from criticism and keep expectations about market valuation realistic. And you would also be the only person in your entire company with a handle on this stuff – which creates job security.
Last, and today alas, also least, is rational investment – fundamental, buy-and-hold volume. Most everybody uses algorithms to execute trades, so we watch what’s NOT driven by algorithms, because that’s how you find the elephant tip-toeing across the putting green. It’s not what blots out the sun because you won’t see that. It’s the little blades of grass that have been crushed. Most importantly, this volume reflects real value – the rational price. It’s watch-list driven, so how it comes and goes differs from the jangle and clatter comprising much of trading today.
So how do market-structure analytics differ from other classic tools, particularly surveillance? Market Structure is all about, and only about, what’s behind price and volume. We don’t mean the “we heard that,” or the “it may be.” No supposed reasons, rumors, or peer-group activities. It’s not technical analysis. It’s what kind of trading sets price and drives volume -- because again, money doesn’t lie. We’ll see whether it’s fundamental, risk-managed or speculative.
Therefore, IROs and execs, market-structure analytics are an essential part of a complete IR breakfast (program) today. Otherwise, you’re sort of doing IR like a caveman (Emilio Rodriguez, that one’s just to make you laugh!).
By the way, I see commodities regulators have decided that the appropriate response to risks and unintended consequences is to take the bobber off the line.
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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