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Our thanks to alert reader Walt Schuplak at the Market Intelligence Group for commentary yesterday on last week’s escalating battle of bragging rights between NYSE Euronext and Nasdaq OMX. Before we tiptoe by with whispered thoughts (we won’t, to borrow words from King Solomon, grab a dog by the ears), let’s look back at trading last week.
A host of options expired, beginning with 2009 Equity LEAPS (see below for more on these and other options) on the 14th and followed by volatility measures on the 16th and stock, currency, treasury and index futures July 17-18. We’ll say just two things: June 16-July 15, the Dow Industrial Average dropped 1,307 points, from 12,269 to 10,962. July 16-18, the Dow gained 534 points.
So investors finally stepped in looking for bargains, right? Nope. Seismic shifts of capital during options expirations artificially shake up equity values way more than your TV and radio business pundits grasp. The Dow still trades at an 800-point discount to its close at the conclusion of the last round of options expirations. But the focus of money in July shifted from derivatives and commodities back to equities because they were less risky and offered better short-term opportunity (and thus oil prices declined).
Rational investment still does, and probably always will, set real equity prices. Variable human thought retains a sixth-sense edge over machine logic. Math reacts to data; humans make decisions. Lesson? Simply beware of these effects, stay out of their way when you can, and don’t confuse machine-driven risk-management and transient short-term trading for investor sentiment. And investor sentiment is pretty clear: it’s at least 800 points lower, if the Dow is our measure, than it was when investors last assessed risk in June. If you understand these things you can bring a calming hand to the rudder of your investor-relations ship of state.
Speaking of galleons at war, which market is better, the NYSE or the Nasdaq? We can’t just blurt some answer and bring down upon ourselves the glittering edge of the guillotining blade. But we’ll offer these observations: The NYSE puts more emphasis on trading the full balance sheet, while the Nasdaq seeks to capture equity liquidity, and has done so (by encouraging rebate trading – ask me and I’ll explain). The Nasdaq also created a suite of services for issuers, though perhaps at the risk of what you happens when you serve two masters. NYSE has chosen not to compete with its industry colleagues and maybe in part for that reason its Archipelago facility now consistently outpaces any single other execution facility in Nasdaq-traded issues. At the end of the day, though, the whole scene’s gone algorithmic and everybody must meet the same Regulation NMS rules.
From our way of thinking, the exchanges really compete now with big broker-dealers for liquidity and trading dollars. But somebody’s got to issue the issuers. So you have some say and sway here, IROs.
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