Investor Relations, Global Markets and Reg NMS

We are constantly refraining the three reasons why market structure matters to investor relations practitioners – right answers to questions, right places for IR time and effort, right IR measurements. Now, let’s apply options expirations to these actions.

Last week marked the expiration of monthly options. We noticed that overall market structure changed in advance on Monday October 15. We also saw how European, Asian and American markets behaved like pistons, going up and down in small increments. Market gurus would have us believe these swings are indications of fear and greed tied to credit or economic concerns. Whether investors are engaged in continual bipolar reaction or not, we don’t think this explanation has much merit.

Why does this matter to IR efforts? Because it’s important to understand the thinking of your shareholders if you’re to accurately answer questions, effectively expend effort and correctly measure results. Poring over the data, here’s what we think: Regulation National Market System (Reg NMS) in the U.S. markets has moved the search for arbitrage beyond individual market centers onto the global stage (it’s not fully possible yet, but the data tell us it’s getting easier). This comes as little surprise. But the degree to which volume distributes among big American broker-dealers, and big European broker-dealers and Asian structured-products specialists is quite remarkable.

And no matter what traders may say, options expirations are like Santa Ana winds for equity values these days. Derivatives are very liquid and constantly in motion. Still, swings of a percent or two each day played out over a year…the opportunity for gains – and losses – is both alluring to investors and difficult to measure. It’s not 5-10% at a whack, but little pieces done fast and continuously. These actions impact availability of liquidity to fundamental investors, and the transactional nature of equity markets reshuffles sell side priorities.

If you want to be an investor relations star these days, you need to know this stuff. In conclusion, let’s go back to the three hooks.

Did your stock react to news or events – or to a derivatives imbalance? This goes to correct answers.

Which sellside shops moved your stock price, and when? That addresses how and where, and even when, you spend your IR time.

How did money – not volume – respond to your calls and one-on-ones? This goes to measuring your IR activities.

The truth isn’t in market structure alone, but if you don’t know yours, you are taking a big chance with all three of the hooks.

Tim Quast is a fifteen-year Investor Relations veteran and founder and managing director of ModernIR.com, which parses and categorizes over a half-billion shares per week with its trading intelligence system, Equity Analysis. See how our customers are utilizing Equity Analysis to enhance their investor relations efforts. For more information, please visit:What is market structure?.