We’re late this week for a good reason: skiing. We hit the Vail slopes today (and as the comedian said, “We’re here all week!”) See a couple shots off my Blackberry here and here. No new snow in awhile, but the crowds were small, the snow groomed well, the sun shining. It hardly gets better.

Have you been keeping up on the intrigue in global markets? There’s the central banker in Argentina resigning after a battle with President Kirchner over use of reserve currencies. In Greece, even King Leonidas and his three hundred Spartans would find the country’s balance sheet a mighty foe. The Euro has plummeted (after our Italy trip, darn it). Australia leaves its interest rate alone after a series of raises, juicing the markets and dropping the Auzzie dollar.

This seismic activity shifts plates in other parts of the global market, IROs. It’s pretty basic to IR, actually. For instance, in the last three days of any given month we see significant window-dressing activity behind institutional trading, especially if mid-month hedging activity with options expirations is hyperactive.

That in itself isn’t new. But it’s made bigger and badder today because of intertwined trading, investment and economic markets. If a company generates revenues in multiple regions, and its shareholders also have investments in other jurisdictions, it’ll affect your stock price in some way. Risks must be smoothed and absorbed. This is today’s institutional investor’s Job Number One.

Even if we don’t totally believe it, we tend to act in investor-relations as though equity markets are vacuums where prices are set by buyers and sellers who are magically immunized against the figurative dusts and pollens plaguing every other thing on the planet. We think our stock prices go right on tying to financial results, despite the great deal of obfuscating noise, from fragmented markets, to continually fluctuating monetary supplies, to quite literally the price of tea in China, get in between. We can only sigh when we see market commentators continue blithely on, despite massive global monetary dislocation, as though the “free markets” will behave as they always did, shrugging off the seismographic chatter and rendering accurate and proper proxies of value.

So we need to take charge IROs. One key thing we can do is to get better about when we report the crucial information that informs the 25% of the audience still well-tuned to business fundamentals. When avoidable, don’t report earnings inside the last couple days of a month because that’s liable to rock risk-management metrics – especially if you do large business in other jurisdictions. Wait till the following week, when you have leeway. Don’t be in a rush to look like everybody else. Machines love uniformity of timing.

Don’t report during options expirations, because the only parties you’ll really help are speculative traders. Do it before or after. In a sense, you force investors to choose you, rather than choosing to gamble with iron condors or some other put/call tactic. Plus you give those active investors trying to keep fundamentals in the game the best chance to act on your news without being penalized by derivative hedges.

If that’s confusing, think about it this way. For matter, there’s anti-matter. For every credit, there’s an offsetting-debit. Every action on this planet and in our universe governed by the laws of these particular three dimensions produces a reaction. The same is true in trading markets (it takes two sides, every time).

So don’t think in a vacuum. Consider what impact your results will have if you were insuring the investment, not making one.

And now it’s time for après ski!

Jan 19-22: What You Should Know About Program Trading

A word on last week’s panels in KC (see Dick Johnson’s write-up at his superb blog) and NYC about modern trading: Had a great time in KC and felt we effectively explained how different time horizons and purposes, combined with lots of passive market-making, affect stock prices today. In NYC, it was a bit frustrating. We started in the middle and never got out of the maze. Sometimes the magic works, sometimes it doesn’t.

Speaking of the maze, you hear the term “program trading” often. Did you know that every other purpose for owning your stock may be overwhelmed by programs? It’s important to know their effect on your stock, and what’s behind them.

The NYSE defines programs as system-driven orders in 15 or more securities totaling more than $1 million. Every Friday, there’s a blurb in the Wall Street Journal on it, and Friday January 22, it was 27.6% of volume on the Big Board, up quite a bit from the week before.

We view program trading a bit differently because markets have radically evolved since the NYSE defined program trading that way. To us, managed, multi-day, multi-stock order-execution is program trading. Stripping out the jargon, we cluster execution by its behavior, and if it’s being managed to fit volume, and it’s happening over multiple days in more than one issue, it’s program-driven. We miss some, but not much. By our measure, program trading on the Big Board averages over 50% of volume, and a bit more than that on the Nasdaq.

This river of liquidity is the lifeblood of the equity markets. It balances out mutual fund inflows and redemptions, it rebalances ETFs and asset-allocation models and pension and sovereign-wealth funds, and it tweaks portfolios according to market risk. Just a few years ago, it had the flavor of investment value. That is, data on financial performance played a big role in its behavior. Today, those things take a back seat to market risk, an eyelid-drooping term that means “what can screw up my portfolio performance today?”

The markets have changed a lot. Shares for meeting the needs of these constantly swirling programmed waters are harder to locate. There are many intermediaries, and pockets of liquidity tucked into corners, and everything is affected by everything else. Morgan Keegan executes a sell order for a conservative investor in bank stocks, and over in tech equities, the trades trigger rebalancing in leveraged ETFs.

While any little thing can affect trading now (that’s a separate discussion), and high-speed, low-cost execution cloaks some massive inefficiencies in our markets when it comes to re-locating liquidity of any size at all, everything depends on the river. If we don’t have good, healthy program trading, the risk climbs for everybody, and prices move inversely to risk.

During expirations last week, we had a massive, program-led dislocation in the markets stemming from a steep rise in the cost of portfolio insurance, reflected in the pricing of various hedges. So money sold equities to reduce risk, and bought derivatives as insurance. Result: markets crumbled by hundreds of points. This is the truth. We can see it in the data. Anything else is peripheral to risk-management right now.

And here’s what keeps Ben Bernanke up at night, we surmise: half the volume in the equity markets is dependent on program trading. Most of that volume is driven by a handful of very large banks. Liquidity is now being withdrawn from the banking system. Mortgage-backed securities auctions, which have a big impact on other asset classes including equities in programs and which are led by the same banks, are ratcheting down.

If program trading starts falling, risks rise in the markets. This is a delicate balancing act for monetarists. And of course, if something other than supply and demand or buying and selling is setting prices, then the market isn’t really free.

Hope you enjoyed MLK Weekend! We were on bikes for the first time in Twenty Ten as temperatures tickled the high 50s Saturday and Sunday on Colorado’s Front Range.

TRAVEL UPDATE: I’m in Kansas City today joining Joe Ratterman, CEO of BATS, and Jeff Albright, head of equity trading at Waddell & Reed, for a NIRI panel on how stocks trade. Thursday Jan 21, I’ll be at the NYC NIRI meeting with Professor Bob Schwartz of Baruch College, Jim Ross from NYSE Euronext, and Donald Bollerman of Nasdaq OMX to “demystify the markets.” See Events & Articles at modernir.com for more, and join us. Continue reading →

Thought for the day: “Chaotic action is preferable to orderly inaction.” – Will Rogers

Speaking of chaotic action, let’s review trading basics. We tend to think trading is buying and selling stock. To quote John Kerry, would that it were! Most trading today isn’t done for capital appreciation but to capture short-term divergence or to balance risk. Continue reading →

Happy New Year!

I grew up in the Snake River Breaks northwest of Boise. In tiny Huntington, where I quarterbacked the eight-man high-school football team, a guy ahead of me several years achieved local fame at middle linebacker for the Boise State Broncos. BSU was I-AA back then, in the Big Sky league. Last night, it was great seeing the Broncos go 14-0, beating undefeated and 4th-ranked TCU in the Fiesta Bowl. The little big sky school has come a long way.

Speaking of a long way, here we are in Twenty Ten. What to expect this year? Continue reading →