We’re prompted by vigilant reader Scott Wylie (no subscriber to our services, be ye advised) to say more about actions IR folks can take when armed with market structure knowledge. This past week offers a smorgasbord of such opportunity.
A word on federal intervention in equity markets (you know we must): The essential problem in our markets is a lack of certainty about the value of things – assets on books, buying power, etc. Intervention supposes to set values by rule rather than by rational money behavior (in the tens of trillions of dollars, sitting on sidelines). Our currency is a fiat instrument dependent on the actions of buyers and sellers for defined value. So, Aristotelian reasoning, intervention perpetuates the uncertainty of the value of money. This, tendentious tantrums of politicians in any party notwithstanding, is not preferable to the alternative, even if it’s more than $700 billion.
Anyway, on to IR ramifications of the developing new world order in American equity markets. Prime power is currently concentrating into fewer hands, with Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank, UBS and BNP Paribas emerging as primary forces (it’s so evident in order flow as to border on stupefying). Four of these six do not emphasize primary equity research. This may mean shouldering more buyside outreach in coming months, and depending less on sellside assistance. The good news is that nimble sellside boutiques may see a sort of renaissance ahead, if they work hard.
And among Primes above, only Morgan Stanley can lay claim to deep liquidity pools, so it’s going to be harder for the buyside to build positions, and harder to hide those efforts from speculators watching for changes in Prime order books. Translation: the markets will be less efficient. But more good news: you may be able to differentiate better between strong and weak sellside shops.
Risk management and speculation are likely to be even bigger now as factors in equity value. You may need to reset your execs’ expectations, IR practitioners, about what constitutes full equity value. If there is less information circulating, and fewer tools – with changes to short-selling rules – for pension funds and hedge funds and insurance companies to manage risk, do you think fundamental investors are going to be more aggressive or less aggressive? And if there is diminished demand acting on the same supply, what happens to prices?
So here’s a suggestion, IROs: First, track which firms are making markets effectively in your stock each day next week. Generally, Monday and Friday bring more short-term fundamental portfolio changes, while Tuesday, Wednesday and Thursday aid market neutral arbitragers leveraging derivatives strategies. And second, look at your market makers in August and compare that list to who’s active in the past five trading days. Which Primes are big now? Do you see more influence by options traders like Susquehanna, Dart, Knight and Interactive Brokers?
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."
