Hope you enjoyed Thanksgiving! We hosted family in the high Sierra Nevada and relished both the bird and the break from phones and email, which is obvious in the accumulated flab.
Back in reality, the markets juke and jive. Before we get to measuring IR, lets talk about whats happening for a moment. Weve watched volume shift from prime brokers and conventional exchanges to fast and inexpensive alternative systems. Thats not new. But know this, execs and IR folks: volatility persists because traders are making money. No matter what the financial press say. Would that some enterprising reporter would write on whats really happening.
Example: Chicago-based Ronin Capital, which runs proprietary trader Dart Executions, has exploded on the scene. Not since Getco launched its rebate trading desk a couple years ago have we witnessed such a surge. Dart massively trades multiple asset classes at high speeds. In equities, Dart is spanning the market capitalization spectrum. Even fundamental desks are following suit, leveraging equity platforms for risk-arbitrage and delta-neutral derivatives tactics.
Watching, say, options strings is insufficient to paint the picture. Why? We cant prove it, but we think a new breed of synthetics is out there now. Wheres the money coming from? Conventional institutions are engaged in this, because theyve got charters to produce returns, which cant be had presently through buying and holding. We also believe the biggest capital force remains Asian and Mideast money, evident in large volumes routing across European desks.
Now, back to measuring IR. What to do if your compensation packages turn in part on stock appreciation? Time to propose different measures. Its neither fair nor realistic in the near term to assess IR effectiveness on that basis. Whats fair? How about setting before your management team four market-structure criteria on which you should be evaluated:
A) Provide a regular and accurate rational price the level at which human investors will jump in front of trading machines. This is the real measure of business value.
B) Monthly answers to management and boards of directors about the effect on price of speculation and risk-management, not just what rational investors do (who arent doing much of anything right now).
C) Regular rankings of your best sellside trading supporters and how youre leveraging them (everybody tracks top institutional holders but they dont often set price).
D) Your plan for making the most of market structure realities: program resets early each month, options expirations mid-month, and portfolio cleanup at month-end.
These are not the same equity markets that existed even a couple years ago, and performance measures must evolve too. We here at ModernIR want to help you keep your bonuses (a little humor, there).
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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