Subscribe1. For the first time that we ever recall, Archipelago’s volume (in our sample group) topped the Nasdaq Alternative Display Facility’s displayed and reported volume (drop a note and I’ll explain what it does). We believe it indicated that risk management systems could find no firm footing ahead of options expirations on 1/18. It’s noteworthy that when the Federal Reserve acted last summer and in September, both interventions occurred immediately ahead of options expirations (the only exception came at the end of October). Why? Prime brokers like Citigroup and Merrill Lynch provide capital to clients behind the bulk of daily volume, and their capacity to support institutional strategies has been reduced by asset writeoffs. These firms and most all of the biggest primes are also primary dealers for the Federal Reserve. Do they influence monetary policy? We’ll leave you to your conclusion.
2. Prime brokers for the first time in months outpaced Electronic direct access on Friday 1/18. Total volumes that day were 60% of levels on 1/16, but these results countered more recent trends reflecting high electronic, anonymous order flow. Primes helped quant clients earlier, and are now moving to protect themselves.
3. In January so far, there is a dearth of rational, fundamental order flow. We’re simply not seeing real money committing on dips - hardly a surprise. Yet it’s not capitulating either, so far as we’ve seen.
If the Fed can’t catalyze fundamental money, what can? To be brutally honest, bloodletting. Weaker elements - the labored hedge funds with over-extended leverage, some weaker middle-market banks - of the capital-markets infrastructure need to go away, not be propped up. The Fed - governments in general - don’t like failures because they reflect badly on policy. But free-markets systems are by nature lumpy. Once casualties have been counted, the strong will pick up the slack. We can see among banks behind volume that already some of the stronger forces are emerging.
Speaking of which, let’s tap one 2008 trend: Successful Investor Relations practitioners will get to know the sellside more, not less, expanding relationships to include derivatives traders and structured products strategists in order to better understand how they help the buyside manage capital and risk. That in turn means improved knowledge of forces in your equity market and how to act in the best interest of your shareholders.
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: ModernIR.com. For more information on market structure, please visit: What is market structure?
Article Author :Tim_Quast
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