Moving with a collective nod to our topic this week, what is this thing called “high frequency trading”, IRO’s and executives?
Well, it would be a good name for a rock band, but high frequency trading is an indication of the behavior of money and a measure of market risk. It is currently responsible for 20-30% or more of the volume. Practically speaking, it is continuous, step-by-step, high turnover buying and selling with real-time data to control risk and generate returns from the minute change. It comes from all sorts of capital sources, but don’t blame hedge funds alone. All investment advisers must put money to work…and if they can’t invest it, they will use it in other ways. This is the best way at the moment. (NOTE: Speaking of which, look for money to leave stocks for the Treasury Department’s ridiculous lending facility for risky credit assets as options expire next week. This won’t be good for stock prices) .
Both Nasdaq OMX and NYSE Euronext announced recent fee changes designed to attract “high-frequency traders.” If they’re trying to attract you, it’s because there’s a lot going on, except it’s happening elsewhere. Here’s the revealing feature: both exchanges made changes to the cost of CONSUMING liquidity, or buying, while maintaining “discounts” or incentives to provide liquidity (another way of saying ‘offering shares for sale, which attracts buyers’) tall.
This means that there are changes at work in the broad markets. Where “rebate” trading, or the provision of liquidity, is necessary to help conventional institutional investors, such as pension funds, efficiently buy and sell large numbers of shares, high-frequency trading relies on buying and selling. nearly equal and offset in very small increments. That’s the type of activity that currently dominates volumes (and why volumes are also down overall).
What does this mean for investor relations? We’ve always had a pretty arcane profession populated with terms like guidance, Reg FD, and earnings call. Our ability to understand concepts that often make other people’s eyes glaze over is a defining mark of the investor relations professional. Well guess what? It’s happening again.
All this high-frequency trading means that much of the money that moves its price and volume sees high-risk stocks and studies the behavior of the stock markets, not the trading fundamentals. This has been going on for some time, but it’s getting worse and worse, and it’s not going to get any better anytime soon. So, friends of IR, it’s time to add this knowledge to your repertoire. After all, someone has to know what’s going on out there, since the SEC apparently doesn’t, and it might as well be us.
Look, our goal is to make you laugh on purpose. But I hope you remember this: well, more than 80% of US companies (and about the same number of European companies) make earnings calls. However, the fundamental investment represents around 15% of the volume at best. Wouldn’t it be better if we understood the rest? We believe that knowing the structure of the market is just as crucial to IR now as earnings calls.
And it shouldn’t cost you much more than your income, either. If so, you are paying too much. IR departments don’t need expensive and outdated tools that don’t work in modern markets.