For Wall Street, summer ends on the last trading day of August. Boy, was that apparent in the data. It was like somebody whistled loud and barked, “All right, everybody, out of the pool.”
Well, maybe not quite so bad. We borrowed that imagery from Bill Cosby’s old comedy routine about God, which is hilarious. Anyway, getting to facts: the last week of August reflected what we call “autopilot trading,” with Prime brokers running the show up to and through month-end/summer-end portfolio rebalancing on August 29. You might’ve noticed curious things in your price and volume August 27-29, and this would be the reason. It seemed to affect roughly 70% of equities.
Contrast this with trading September 2-5, when the big buyside guns were back behind the turrets and plotting autumn operations. Direct-market access trading jumped almost exclusively at the expense of the big Primes. Wholesale volumes dropped by more than 25% too, as traders used up lingering liquidity.
What’s this mean to you, IROs and execs? As always, we want you to distinguish between perceptions of your business, and actions on Wall Street that have to do with managing risk. The buyside returned, saw that credit markets were still a mess and that federal action on Fannie/Freddie was likely, and moved to free up capital for chasing what divergences might become manifest.
In some places, these changes wreaked havoc too. You no doubt read about the London Stock Exchange’s trading difficulties Monday September 8, when it was unable to process significant amounts of order flow. The US exchanges have had similar problems in the past, as you know from Wall Street Journal and other articles, when electronic and derivatives-related trading have peaked. In fact, all last week we were hearing about difficulties in European market centers, and we think these conditions contributed to order flow imbalances that markedly increased volatility in large-cap issues in particular. We could be wrong of course, and the evidence is circumstantial only, but it’s abundant and widespread, and we’d be willing to make a strong wager on it. Worsening matters, most of this order flow moving back and forth between major global market centers is automated. So it’s like a key flight getting canceled in Chicago. The ripple effect runs through the entire air travel – or trading – system.
In short, don’t wring your hands too much if last week was ugly for your equity. We expect equilibrium sometime between now and next Wednesday, ahead of options expirations and index rebalances hitting around September 19. It’s never boring, is it.
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."
