Transferring with a shake of the collective head to our matter this week, what is that this factor known as “excessive frequency buying and selling,” IROs and execs?
Nicely, it could be a great title for a rock band, however excessive frequency buying and selling is a sign of the habits of cash and a measure of market danger. It’s chargeable for 20-30% or extra of quantity presently. Virtually talking, it is continuous, tick-by-tick, high-turnover shopping for and promoting with real-time knowledge to manage danger whereas producing returns from minute change. It is coming from all kinds of capital sources, however do not blame hedge funds alone. All funding advisors should put cash to work…and if they can not make investments it, they will deploy it in different methods. That is the easiest way proper now. (NOTE: Talking of which, search for cash to go away equities in pursuit of the Treasury Division’s ridiculous lending facility for high-risk credit score property as choices expire subsequent week. This won’t be good for fairness costs.)
Each Nasdaq OMX and NYSE Euronext introduced current charge modifications designed to attract “excessive frequency merchants.” In the event that they’re attempting to draw it, it is as a result of there’s numerous it occurring, besides it is taking place elsewhere. Here is the telling characteristic: each these exchanges made modifications to the price of CONSUMING liquidity, or shopping for, whereas maintaining “rebates,” or incentives to supply liquidity (one other solution to say ‘providing shares on the market, which attracts patrons’) excessive.
This implies there are modifications at work within the broad markets. The place “rebate” buying and selling, or furnishing liquidity, is critical to serving to standard institutional traders like pension funds effectively purchase and promote massive portions of shares, excessive frequency buying and selling is dependent upon practically equal and offsetting shopping for and promoting in very small increments. That is the sort of exercise presently dominating volumes (and why volumes are on the entire down, too).
What does this imply for investor relations? We have at all times had a relatively arcane occupation populated with phrases like steering, and Reg FD and earnings name. Our skill to understand ideas that always make different peoples’ eyes glaze over is a defining mark of the investor-relations skilled. Nicely, guess what? It is taking place once more.
All this high-frequency buying and selling signifies that a lot of the cash shifting your worth and quantity sees excessive fairness danger and research equity-markets habits, not enterprise fundamentals. This has been occurring for a while nevertheless it’s getting worse and worse, and it isn’t going to get higher anytime quickly. Subsequently, IR of us, it is time to add this information to your repertoire. In any case, anyone’s gotta know what is going on on on the market – for the reason that SEC apparently would not – and it’d as properly be us.
Look, we’re purposely aiming to make you chuckle right here. However I hope you may keep in mind this: properly greater than 80% of American firms (and roughly an equal variety of European companies) maintain earnings calls. But basic funding is accounting for about 15% of quantity at finest. Hadn’t we higher perceive the remainder? We predict understanding market construction is as essential to IR now as earnings calls.
And it should not price you far more than your earnings calls, both. Whether it is, you are paying an excessive amount of. IR departments do not want costly, outdated instruments that do not work in fashionable markets.