Market Structure, Investor Relations and Electronic Trading

If your stock was volatile on Thursday October 11th, you were not alone.

ModernIR categorizes and tracks trading volume (execution), which is different from stock surveillance (settlement data). We track the execution data to identify the forces at work in a stock's market structure. If the stock markets don’t return to early October highs, we think the source of the divergence will be a result of trading actions on October 10th and 11th. This may have a pronounced impact on your investor relations efforts.

There are three core forces behind a stock's daily order flow: a) electronic order-matching, b) program trading, and c) speculative arbitrage that occurs around the first two forces. It’s not unusual for the three forces to drive 90% of volume. In order to maintain efficient equity markets and support both trading and investment, equilibrium among these three forces is desired.

For instance, on October 8th, electronic trading levels increased. By the 10th, electronic trading accounted for 44% of all order flow, about 20% more than either programs or arbitragers. On Thursday, the Prime broker trading behind programs essentially said, "All right, everybody, out of the pool." It is unclear Whether this trading activity was the result of the broker-dealers pressing the reset button themselves or responding at the behest of their institutional clients. Either way, the markets have not been the same since – and options expire on Friday right during the midst of third-quarter earnings reports.

So what's going on and what does it mean for your IR efforts? It may be that Primes brokers like UBS Securities are able to watch order-flow imbalances across many different asset classes and perhaps even intervene for the sake of regaining institutional order flow. After all, if the buyside choose to skip brokers and go straight to the markets through electronic systems, that eventually translates to lower revenues and earnings for broker-dealers. We also believe that speculators in currencies ("forex") and commodities leveraging off equity platforms got tripped up by their own models. Maybe this is why oil continues to make new highs?

Regardless, these activities impact the responses of institutions to fundamental business performance. If you don’t understand their role in your equity market – call us redundant to the point of exasperation – you can waste precious investor relations time, money and effort working at results that can’t be obtained.

If you’re blessed with great business catalysts, the current market conditions are your friend.

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?.