The August 18 Wall Street Journal “Heard on the Street” column by David Reilly used data from Q3 2007 to illustrate how insider buying at financial firms wasn’t a good barometer for the sector’s market bottom.
In fact, Reilly, contrary to long prevailing convention wisdom, says insider purchases aren’t generally accurate indicators of value even though logic suggests that executives running companies would have the best information. On the other hand, data, as Reilly used them, seem to suggest that selling by insiders provides a far better predictor of stock and sector behavior. For support, Reilly points to Q3 2000, when financial-firm insiders sold more stock than during any tracked period – just as the internet bubble burst.
What’s this got to do with market structure and investor relations? Suppose that at least half the money behind your trading volume is NOT predicated on underlying business value. In that case, your insiders (including you) might think, “Our stock is a great buy right now relative to underlying business value.” It might be. But that notion has zero relevance if the money setting your stock price isn’t predicated on the same measures. Unfortunately, your insiders buy stock anyway. And your investors watching insider buying do so as well. And down the stock goes, anyway, leading your investors to perhaps conclude that insiders don’t know the facts of their businesses very well.
Here’s a radical idea: what if…the IR function helped insiders incorporate an understanding of market structure into these decision-making processes? Market structure will reveal if volume is being driven by quantitative or speculative trading, and whether the nature of the equity market is conducive to the entry of fundamental forces. The systems employed now by trading desks to analyze the economics of buying and selling are incredibly sophisticated, and they play major roles in buying and selling decisions. If you see what those systems see, you can do both your insiders, and by extension your investors, a good turn. And you’ll increase your worth and your compensation value at the management table.
Look, don’t conclude that these steps will utterly and irreversibly alter the outcomes of insider buying. But in what other decision-making processes of which you’re aware do the deciding parties omit 50% or more of the detail relevant to accurate conclusions?
We’ll leave you to ponder that.
Meanwhile, we said last week to expect daily market ups and downs until we’re past the last of this month’s options expirations on August 20. They were split this month, as in May, between 8/14-15 (stock, index expirations) and 8/20 (volatility expirations).
We know that stuff thanks to market structure. For clients, we even see which firms drive what sort of volumes. It’s quite helpful.
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."
