Search Results for: ETFs

High Correlation in Stocks

While Irene splashed Wall Street, we Coloradans reveled in the ridden glory of the USA Pro Cycling Challenge. The 500-mile route hosted 130 of the world’s top cyclists including Tour de France winner Cadel Evans and both runners-up, Luxembourgers Andy and Frank Schleck.

We were there, clanging bells and hooting our hearts out. Here is winner Levi Leipheimer readying for the time trial that put him in yellow. The peloton left Avon here for Steamboat, and Levi is visible midway in yellow. At the finish, some 250,000 jammed downtown Denver for the epic, lapping conclusion. We are proud of American cycling and our state’s awesome organizational effort.

Speaking of peloton, Wall Street Journal reporter John Jannarone wrote Monday in the Heard column called “Traders Seek Salvation from Correlation” about how stocks race in formation. It’s among the best pieces we’ve seen on modern trading. Jannarone says that S&P 500 stocks show 80% correlation in the past month, meaning eight in ten move synchronously.

This is a source of distress for IR folks trying to distinguish a strong company story from the herd. We’d argue that rather than slamming the collective IR noggin into the burgeoning brick wall of macro-focus investing that you instead track program trading and establish what level is acceptable – and use it as an IR success measure. We wrote about this last week, so we won’t retrace the trodden path.

Why a mirror image across so much of the market? One driver Jannarone posits is Exchange-Traded Fund investing. According to Credit Suisse, these drive some 30% of daily stock volume. Jannarone also notes that trading in S&P 500 E-mini futures contracts is more than four times the combined daily volume of the two biggest S&P 500 ETFs, the SPDR, and iShares S&P 500 Index ETF. (more…)

We were in San Francisco Sunday escaping the heat parching most of the country. Cool heads are better than hot heads, we thought. It was nice to need a sweater.

Speaking of needing things, there’s a flaw in consensus estimates. Consensus by definition means it’s the general view. But the general view reflected by estimates of earnings, revenues or cash flows comprises less than 15% of total market volume.

Across the market, we find that about 12.5% of substantive volume is what we’d call rational – driven by thoughtful investment derived from fundamentals. How can this be? Great swaths of trading today are driven by relative value – the current value of this basket of things versus that basket of things.

Somewhere around 30% of volume is this kind of trading that we consider program trading. It’s driven by market factors and relative value. After all, currencies that denominate securities have only relative and not intrinsic value. Should we not expect trading instruments to behave the same?

What’s more, some 65% of total market volume on average is just air created by the maker/taker model prevailing across global exchanges, in which we’ve all been fed this line of hooey that a massively mediated market is better for buyers and sellers than one with few intermediaries. When in the history of human commerce has it been more efficient to cut the middle man in rather than out? (more…)

Exchanges Propose More Price Controls

The Boii are back in town!

I refer not to the 1976 rock hit by the Irishmen of Thin Lizzy, but to the central European tribe that gave Bohemia its name. We just finished getting tribal in the Czech Republic and Austria, eating and drinking by bike from Prague to Vienna. And with the leaden nature of food and drink there, you’d not be advised to do one without the other.

Examining data, markets expected upside before the Fed gave more reason today. Where August trading showed striking amounts of speculative trading, indicating abundant day-to-day opportunism, September shows higher program trading, lower speculation and more selective rational investment. These are hallmarks of better certainty, even if the reasons are structural rather than fundamental. We take upside in whatever form it may come. We suggest you leverage it in your IR programs. (more…)

Actionable

What does the word “actionable” mean to you?

It’s a decent name for a rock band, yes. But it means “what stuff can you do with this?”

Traders want actionable data – something to drive opportunity for profit. Investor-relations professionals want actionable tools – something that’ll improve stock ownership, share price, results of IR effort.

Knowing who owns your stock is good. But what actions can you take? Talk to sellers? That’s uncomfortable. Plus, unless you’re screwing up, selling is a compliment, an investment objective. The sellers should well buy again, when the time’s right. (more…)

Trading Goes Beyond the Edge

We were in Lake Jackson, TX, last week for Karen’s HS reunion. South Texas is a sweat lodge this time of year, but the Saint Augustine grass lies lush and luminescent under the sycamores and live oaks. And we saw not one tar ball on Surfside Beach in Freeport.

A word on trading: We expected money to move after options expirations, but changes to program-trading plans came early, on July 14, we observed in the data. So with expirations July 15-16, markets were shellacked when money shifted to other assets. The past two days have given us massive arbitrage around this shift and ahead of tomorrow’s volatility expirations. Thus, the week could end on a rough note, we fear. (more…)

Of Beach Balls and Risk Allocations

Sorry to keep you waiting two extra days this week! We were in San Diego, where June Gloom outside contrasted with the festive mood filling the Manchester Grand Hyatt for NIRI National 2010, the annual gathering of IR professionals.

Attendance jumped from last year. A few new firms joined the lineup on the boulevards in the exhibit hall. One first-time attendee working in corporate governance said as we sat by the fire pit Monday night and watched the party crowd and the live band and the oddity of the evening, a young woman rolling around on the pool in a giant see-through inflated ball, “You NIRI folks are the nicest conference goers I’ve ever met.” (more…)

It May Not Be About You

In Denver we get sun, rain, snow, sleet, hail. And then comes the next day. Today, a clear, bright and breezy 75 degrees Fahrenheit, photographers out snapping chamber of commerce pictures, the power goes out. It’s put us behind schedule.

Speaking of power outages, starting April 22 equity markets developed voltage problems. IR professionals, we’ve got two words for when you meet the CFO in the hallway and she asks, “What’s up with the stock market?”

Risk Management. What two words did you think we were going to offer? “Risk Management” is why the same stocks that were up yesterday can be down today. We saw surging European and Asian inflows April 22, and a reversal of the same inflows on April 27.

From the IR chair, it’s flummoxing. Your nearest peer, in the same industry, about the same market cap, doing similar things, reports results on April 22 and beats expectations and soars 10% in a day. You then report the same good results almost pound-for-pound, a handy beat. And your stock declines three percent.

What gives?

Time for those two words: “Risk Management.” Large portfolio trading schemes such as pension and investment funds may hold an array of securities. Let’s say euro-zone bonds, currency futures, US Treasuries and US growth stocks. Suppose these investments are protected with risk metrics software from SAS, and trading-desk level systems from prime brokers JP Morgan and Deutsche Bank. These systems are designed to monitor and maintain portfolio risk and return within certain parameters.

Greece’s bailout is approved. The systems determine that this will strengthen the US dollar, thus weakening inflows to US equities from European and Asian sources. The systems themselves execute automated trades, complete with offsetting derivatives, to control risk.

This behavior causes a domino effect. The same securities the system said to buy last week are now the ones it sells. That triggers other limit orders and stop-losses, changes the nature and size of passive market-making trades, and attracts statistical arbitragers finding fleeting imbalances. And because ONE variable in the overall risk-management schematic is different – maybe a risk metric is the ratio of dollars on reserve at the European Central Bank, which has just returned a bundle of them to the US Federal Reserve – it over-corrects.

The next day, the system tries to rebalance the overcorrection, producing a spike in US securities again. Commentators bray about renewed enthusiasm for US economic growth, which in fact plays almost no role. Leveraged ETFs had just today adapted to yesterday’s big risk-management change. Now those are out of balance.

Suddenly, inefficiencies abound. Passive market-making systems aren’t getting liquidity to the right spots fast enough. Stat arbs are executing simultaneous offsetting trades in ten different market centers, creating the illusion of movement where none exists.

And the next day, the risk-management system tries to rebalance again.

This is how you get great volatility in markets designed to function smoothly and efficiently.

You don’t need to explain it in detail to your CFO. But you should be able to say, “We have integrated global markets. Our results, which were great for our active investors, now are secondary to global risk management. That’s the reason we’re under pressure. It’s a portfolio problem.”

But portfolio problems are our problems too. What’s the answer? We invite your suggestions. Meantime, be sure management doesn’t take it personally. It’s not always about you.

Loveland Ski Resort an hour up I-70 from downtown Denver logged 26 inches of snow in the past five days. We’ve had to cover patio plants the past two nights as temperatures dipped to 30. It’s bright and clear. But winter has had a hard time letting go this year.

Meanwhile in Europe, Morgan Stanley launched a lending book for European Exchange Traded Funds (ETFs) today. Here is the key to understanding financial reform currently mucking up Congress. It encapsulates everything that’s wrong with today’s capital markets. (more…)

Sorry we’re late this week! We’re in Las Vegas and the Market Structure Map wanted to stay in Vegas, apparently.

Program trading jumped about 10% in the first few trading days of April, compared to March. We define program trades as mathematical execution in more than one stock at a time that follows a market trend. We believe the increase in part reflects improved institutional and retail commitments to various equity index vehicles. But it also shows how “market neutral” trading strategies that continuously buy and sell a wide variety of securities to achieve small profits when netted out have become mainstream.

It shows up in interesting ways. (more…)

What You Should Know About Program Trading

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. (more…)