Volatility - Why Market Structure Matters
IROs, you probably get a twinge now and again when people whine about your stock price, especially in volatile markets. It’s a reminder why market structure – understanding the nature, kind, size and distribution of participants – matters, particularly in times of volatility.
We can tell you as guys surrounded by cold data that typically when the market moves radically market structure data do not show that “investors reacting to an unexpected spike in the consumer price index sold off today.” Case in point as we’ve noted the past two editions of the Market Structure Map: equity markets broke down when options expired on July 20, well before the first Dow dip on July 26.
What’s this mean practically, IROs? Most of the time it’s not about investors selling off, but black box and other trading strategies adjusting to intricate data designs. Yes, sometimes it’s fundamental investors. We saw that in the data on both July 27 and again this past week. But chances are, more than 60% of your liquidity on any given day moves through trading systems, programs, ETF-related algorithmic adjustments and high-frequency systems. Lesson: most times, fundamental investors aren’t responsible for your upticks and downticks, so if you’re focused on which names are buying and selling, you’re probably wasting at least some of your valuable IR time and money.
Lessons in conclusion:
1. Even in these wild, hedged, risk-managed, paired and algorithmically driven equity times, good long-term investors still don’t knee-jerk react.
2. Remember, it’s probable that the majority of your daily volume is impelled by trading systems, not investors (so if you know nothing about those systems, how can you give accurate answers?).
3. Understand the short-term market-structure view so you can maintain long-term peace of mind.
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 systems. More information is at: www.modernir.com
Tags: equity analysis, investor relations, ir firm, market structure, modernir, trading intelligence
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admin on February 19th 2008 in Finance
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