Thrilling. Arduous. Rewarding. Draining. Spectacular.
No, not the Federal Reserve Open Market Committee meeting concluding today with a soliloquy before public microphones from the chairman.
We mean our grand cycling adventure riding the Rockies on the high backbone of the fruited plain last week. After 1,500 training miles we clocked several hundred more and about 25,000 vertical feet climbing a collection of the globe’s great mountain passes. The desire accomplished is sweet to the soul (one of my favorite sayings because it reflects the human spirit). Here are Independence Pass, the rim of the Black Canyon of the Gunnison, atop Ute Pass northwest of Silverthorne, and aspens outside Aspen.
Speaking of epic, NIRI this year again reminded me about the divide between how markets work now and – take no offense, it’s just a refrain from IR pros – what most of us know about them.
Here’s a current example. Why were prices and markets swinging wildly Tuesday, with disparity between major measures and extreme moves in stocks? Rational investment? Most of us intuitively know investors aren’t responsible.
What is? Fluctuating currencies, yes (hour-by-hour now). But did you know that VIX futures expire today? Last Thursday and Friday, other options and futures expired, and S&P indexes rebalanced.
Behaviorally, expirations are seismic (we study trading behaviors at a mathematical level) because trading is global, 24-hour, and multi-asset-class. When an instrument like a futures contract expires, there’s a ripple effect.
It’s because investors have become asset managers. They hedge exposure – buy insurance policies comprised of other securities. During expirations, insurance policies lapse. Money must decide whether to renew or adjust them, or change asset balances. Those considerations can trump investment themes during expirations.
Plus, a great deal of money today invests not in securities but in the gaps between them. It’s volatility as an asset class itself. In the gap between the expiration of old options and futures (on stocks, indexes, ETFs, Treasuries, bonds, currencies and commodities) and resets to the implied volatility of the S&P 500 called VIX Futures, lies a grand vista of volatility opportunity. Money may aggressively trade different stocks up and down to try to trigger filling or covering on swaps or Contracts for Difference (CFDs).
Here’s what can happen. Your stock jumps 10% while your peer group is flat. What gives? It could be that – just an example here! – Deutsche Bank has written a CFD with a Fidelity beta portfolio that pays out in your shares if your volatility exceeds that of the VIX. Speculators using regression analysis on terabytes of data may detect patterns in trading that leads them to gamble on your stock or a basket of securities on the belief that doing so may trigger swaps or CFDs. They buy your options and small, aggressively priced increments of your stock – and force Deutsche Bank to cover. You know something crazy is happening but you can’t quantify it.
Divining motivation in these moves is frankly pointless. It’s volatility as an asset class. But there are two clarion calls to the IR chair in this week’s story:
Avoid big news or announcements during options expirations. It opens your stock to speculation – and major risk-management adjustments. Often it’s beyond your control. When it’s not, don’t do it.
Become the resident expert for your company on market structure. It will separate your IR program from those of your peers, and it will make you more valuable, epically so, to management.
And always, seize the day. Stretch yourself. The desire accomplished is sweet to the soul.