Market Structure Alerts – Definitions & Use

Behavioral Alerts:

  • Active investment (Story) = The money that buys your unique Story. Active holders with whom you communicate.
  • Fast Trading (Price) = Computerized proprietary day-trading by firms like Citadel, Jane Street. Market-making. Investment horizons of a day or less. Also, buyers of retail order flow.
  • Passive Investment (Characteristics) = Indexes, ETFs, quantitative investment. Money investing for macro, model-driven reasons. Dominating investment behavior now.
  • Risk Management (Derivatives) = Derivatives as the purpose for an equity trade. Options-tied trades, portfolio insurance, substitutes for stocks in indexes.

Rational-Price Alert:

  • Rational Price: The midpoint price when Active Investment outcompetes other behaviors to buy shares. Measured when: Price closes over intraday midpoint, lead behavior by day-over-day change is Active Investment, the change is statistically meaningful. You should know when that occurs so you can correlate to news or outreach, if applicable.

Short Volume Alert:

  • Short Volume (“Supply”): Reg SHO Rule 201 data set codified by the SEC in 2010 and overseen by Finra. The percentage of daily trading volume from borrowed or created stock. Market-makers engaged in bona fide market-making (buy and selling both) are exempt from locating shares to short and are required to fill trades when no sellers exist.

    High (50%+)=     Tends to constrain price. Big changes at expirations, ahead of results, signal directional bets.

    Low = Low Supply, strong Demand, tends to lift price. Low shorting can be a precursor to event-driven behavior like deal-arbitrage, Activism.

How to Read:

Company Name Inc. (TCKR)
Trade Date: 3/07/2024
Closing Price: $17.92
Above Midpoint: $17.83
Passive Investment rose: 20.3%
Market-share of volume: 33.1%
Primary driver: Passive Investment is buying

  1. Price was over the midpoint, pointing to net buying, because 90% of trades are derivations of midpoint.
  2. A 20% increase is statistically meaningful but not massive (such as over 100%). 
  3. Passive Investment is indexes, ETFs, quants, not fundamental.
  4. View market-share against behavioral averages in your Market Structure Report. At Jan 2024, behaviors roughly average:  Active (9%), Passive (24%) Fast Trading (48%), Risk Mgmt (19%)

Purpose: Tracking trends, understanding key drivers of shareholder value

Example: If you’ve been on the road seeing investors and Active Investment rises, new Rational Price set, immediate feedback mechanism on Story as driver of shareholder value.

Example: If your Short Volume jumps above 50% and the next day your shares are down, the answer isn’t just something occurring today but that market structure indicated rotation was already underway (high Short Volume can signal rotation).

Big behavioral changes signal that pricing of shares has been impacted even if it doesn’t appear so. Harbingers of everything from index rotation to activism or other event-driven behaviors.