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With the markets steady as a loose guy-wire in a gale, weve seen considerable IRO hand-wringing lately. The lament: Who’s behind this knee-jerk selling?
Lets look at the answer this way. Monday, Bear Stearns bought out the minority interest in NYSE specialist firm Bear Wagner and wrote down the investment. Why? For now at least, electronic trading nearly neuters specialists (Nasdaq folks, stay with me; this applies to you too).
As Marketwatch columnist David Weidner observed in a piece today, Only about 50% of the orders in NYSE-listed stocks are appearing on the specialists’ book and most of those orders are electronic. That means they are anonymous to the specialist. The orders come in “shredded,” or in the form of an algorithm, and the specialist won’t even know that multiple orders are from the same clientThis veiling, combined with the growth of private markets or “dark pools” where anonymous trading is the calling card, is leaving many investor-relations departments less sure about who owns or doesn’t own the company.
Yet answers arent elusive if you tweak your IRO thinking. With algorithms engineering market entries and exits, its darned difficult to find Fidelity, for instance. But you can see buyside and trading styles ebb and flow. In others words, you can map the footprints of Fidelity-style folks, thanks to marketplace rules and structure today (happy to revisit Rule 606, Best Execution, etc., but for space Ill skip them here).
Whether fundamental or quantitative, investors react to changes in market structure. Ironically, changes even before they happen are starkly evident in order flow. Case in point: we noted last week how market structure went haywire with July monthly options expirations. Yet the tripwire triggering quantitative selling didnt strike until August 26. The same features are evident in individual equities that is, in your stock.
One last thing, we said last week that by August 27 basic supply and demand had harmonized. Were we wrong? Be sure we are at times! But not this time. The markets reflect characteristics of a loose guy-wire now chiefly because risk-management strategies employed on a colossal scale have not yet reset (some have resulted in margin calls, sales of underlying assets, reduced exposure, covered puts and callsand more). This also means that markets have been wide open to short-term exploitation and we see it in the order flow. Further proof: our broad glance at order flow by type on August 3 was a nearly perfect mirror image of structure on August 27. The point? Its about hedges, not equities at present.
These systems will reset, and real investors will return. Meanwhile, if youre getting crucified, call us. Im sure we can help you provide solid data-supported answers to your management teams.