Before we get to Little Black Monday 2008 and what it means to liquidity and the IR job, we note that alert reader Walt Schuplak at Market Intelligence Group LLC drew us last week to big drops in volumes.
Thus prompted, we checked, and the data ahead of congressional inaction (not that there’s anything wrong with that) were stunning. Direct Market Access trading was way up – 100% over norms – while speculative equity volumes and prime brokerage plunged. What’s it mean, IR folks and execs? That nimble unlevered institutions are bypassing broker-dealers at unprecedented levels. Speculators reliant on margin are hurting. Primes are facing a crisis in confidence and even the winners a week ago (Goldman Sachs by miles, and Morgan Stanley, and the big European primes) are now throttling back.
So now, to what that 777-point intraday dip the day before Rosh Hashanah 2008 means to liquidity and IR. Of course, it’s but the next milestone on a bridge to nowhere. But first, equity liquidity pools are going to grow in size and shrink in access, we believe, which may ultimately be good for fundamental investors if governments don’t foul up any advantage the equity markets are trying to offer to rational thinkers through this current cleansing process.
Witness: Mitsubishi UFJ bought 21% of Morgan Stanley on September 30, and also completed a tender offer for the rest of Union Bank of California that it didn’t already own. Citigroup has Wachovia. BofA has Merrill. JP Morgan has Bear Stearns and Washington Mutual (and don’t think these last three aren’t sweetheart deals done by the Federal Reserve to support its critical distribution system, the primary dealers). Expect next to see consolidation in European ranks (Credit Suisse, BNP Paribas, Calyon/Credit Agricole, Societe General, UBS, etc…).
When we’re through, we believe a few big commercial banks (that’s what all these firms will be, and Raymond James just converted, too) will command vast liquidity, unshared in dark pools like today. This will just be a stepping stone toward some further evolution, perhaps back to smaller firms again. But whatever the case, power will shift from broker-dealers’ trading platforms to proprietary liquidity – which is good for big fundamental investors because it returns some economic imprimatur to the process of investing in public equities and building relationships with brokers. And it’s the lesson learned by big banks through this credit crisis. Don’t get too excited. We’re a long way from good yet.
Meanwhile, what do you tell management about your stock? Currently, risk management is in chaos, with historical data irrelevant to contemporary solutions. Rational buyside thought now is focused on their own leverage, liquidity and value preservation, not weighing business metrics and performance. And fewer, stronger speculators are behind these gigantic swings in index and composite prices, and for them it’s a profitable endeavor that they don’t wish to see end soon.
So be efficient with IR time and dollars because on the whole, returns from outreach will be spotty. Concentrate on unleveraged institutions, and again, remember your retail investors packing the freight once more for Wall Street (that’s what conversion to commercial bank status means: the little guys will save the day).
And pay attention to market structure, because it’s flat-out the only thing that can tell you whether rational thought, risk-management or speculation is setting your price.
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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