Reminder: we'll be at NIRI National 2009 next week (see link below), so you'll have a refreshing break from the Market Structure Map!
Global trading may chime and flash at ever more frantic paces, sometimes seeming like a pinball machine, and your stock that small ball caroming about. But traders and investors report to constituencies who expect and measure results. Even the speed of light gets marked in turns of the moon still (the longest day of the year is coming up soon). So too do institutional portfolios.
If we had to highlight common mistakes by IR folks, wrong conclusions about how and when institutions buy and sell would rank just shy of the top. Case in point: a client this week told of us talking with the CFO as the stock slid in the last hour of trading. The CFO was convinced it was a particular fundamental holder.
Now remember, we preach the gospel of long-term IR peace of mind through understanding short-term market structure, with the nature of money being more important than its name. And today's reminder is this: institutional portfolio managers, like all humans, are motivated by self-interest, and don't tend to cut off their noses to spite their faces.
Expanding on this point, in broad terms, value investors like lots of something cheaply, to hold until it's worth more. Growth investors tend to steadily buy things that are increasing in value, occasionally pocketing profits and continually looking for something growing faster or better. If both kinds of active fund managers own your stock and get benchmarked by their bosses and investors on the basis of monthly performance, what will they do in the last three trading days of a month? And how will the broker-dealers behave who help them achieve their objectives?
Now in this instance, the institutional investor suspected by the CFO of causing price pressure is a total return investor that delivers results to its clients through a combination of yield (income) and capital appreciation. These investors like to lock results by period, minimize transaction costs and tax consequences, and re-deploy profits from growth equities. So is this sort of investor likely to move shares before month-end, or in the new month?
Pretty basic logic tells us they'll lock profits ahead of month-end, right? You don't want to handicap your portfolio's monthly performance right off. You take profits before the month concludes, using a broker dealer to buy it up above your sell price (primes do this all the time), so you can deploy that money as the new month begins. The point here is to put yourself in the shoes of a fund manager. Then, the trading data will confirm or deny your conclusion.
Here, we saw a buildup in particular prime brokerage volume the last three trading days of the month. Brokers were helping clients. Those that don't want to own shares won't hold them for more than three days (settlement would kick in), and these shares were released in the new month, creating brief but artificial pressure.
This is important because there was no fault with the equity here, just month-end rotation, and so we knew the price would recover quickly. It's not difficult to grasp these things if you think like a portfolio manager and consider how brokers help institutions achieve their objectives.
Oh, and what did we see broadly in month-end trading for May? Nothing really changed. No new investor enthusiasm, no big fundamental surges. This market continues to be driven by reactionary trading (and artificial money) – but as always, we'll take gains in any form.
Margaret E. Wyrwas - Knight Capital Group, Inc. (Nasdaq: NITE)
Senior Managing Director, Corporate Communications & Investor Relations
Equity Analysis™ subscriber since March 2007
"In global markets driven by automation, changing market structure regulation and dynamic investment objectives, today's investor relations professionals require new data points in order to remain relevant and add value in their company's quest to reduce its cost of capital."
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