In economic terms, it’s the number, size, kind and distribution of buyers and sellers. For investor relations practitioners, the markets globally are moving to a participant model and away from classic NYSE-style auctions, thanks to trading automation and market regulation requiring transparency.

Since the number, size, kind and distribution of participants determine how the buyside and sellside interact with equities, and therefore how equities are owned or traded, it’s crucial for IROs to possess basic comprehension of their stocks’ market structure.

What Others Are Saying

“The market structure we’ve ended up with is great for trading, but it’s not great for investing.”
Duncan Niederauer
NYSE President

“More and more of the world’s trading is done by spraying dark orders across multiple destinations using deliberately complicated patterns and algorithmic models that can’t be discovered or duplicated. No one knows who’s doing what to whom anymore.”
Dan Mathisson
Credit Suisse managing director

“If your investor relations department continues to practice in a traditional manner—especially in this rapidly changing investment environment—it will become increasingly irrelevant.”
Lou Thompson
former CEO of NIRI

How Can ModernIR Help?

ModernIR’s trading intelligence service, Equity Analysis, provides insight into your stock’s market structure by focusing on executed trades. Traders control liquidity, manage costs on the buyside and sellside, and drive the algorithms that even fundamental investors now use to manage capital.

Understanding this activity can be the difference between telling management

“I have no idea”


“We think the market won’t respond much at first, but we’re likely to go into a prolonged slide after options because all these derivatives strategies will reset lower. Therefore, we’re going to retool our message to highlight core value drivers and concentrate our effort over the next quarter on long-term value investors.”

Which would you prefer?

Equity Analysis is not stock surveillance. Stock surveillance is based on settlement, which relies on analyst interpretations of data to determine who actually purchased your stock. This is fast becoming irrelevant in an algorithmically dominated market. For more information, please see: Stock Surveillance – Getting What You Pay For?

Request a demo of Equity Analysis

For additional information on market structure, please see:
Market Structure – Key Words for IRO’s Lexicon

What are dark pools?

Equity markets in the U.S. and increasingly around the world work on a participant model in which those wanting to trade will display shares to buy or sell and the asking or bidding prices. At exchanges, these displayed prices by brokers can be seen through what are called “Tier II quotes.”

The opposite of displayed is “dark.” Thus, the term “dark pool” refers to a place where trading liquidity — a supply of shares — exists that is not displayed for all to see. Think of dark pools as members-only platforms for trading participants wishing to execute larger trades without advertising interest through an open-book, or displayed, position.

There are independent dark pools like Pipeline, Liquidnet and ITG Posit, and broker-operated dark pools such as Credit Suisse’s CrossFinder and Goldman Sachs’s Sigma X. The anonymity afforded to investors and trades through dark pools protects not only the parties’ identities, but also the sensitivity of share prices to movement when any sizeable demand surfaces.

Dark pools serve a highly useful purpose. They enable large institutional participants to move sizeable amounts of liquidity without fighting all the trading intermediation that distorts stock prices. Some are concerned that dark pools themselves garble pricing mechanisms and present the risk of a two-tiered market between displayed and dark liquidity. But all markets are two-tiered. For any product, there are wholesale and retail channels. Same with stocks. There are wholesale and retail brokers, upstairs and floor trading. If anything, dark pools are a response to regulatory efforts to create a single market for all participants, which is contrary to human nature and at odds with the diverse purposes and time horizons that typify trading transactions.

Bottom line: dark pools are a natural response to pricing inefficiency and over- intermediation.

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Through a wave of regulatory and technological changes over the past 15 years, today’s capital markets have become complex rules-driven environments that function in nearly the opposite fashion that they did for the 200 or so years that followed the roots of the NYSE under the Buttonwood Tree in 1792. Once a simple auction place, they are now characterized by:

  • Regulated incentives (a product of the maker-taker model) that drive vast volumes of high frequency trading, upwards of 60% of total volumes;
  • Low levels of rational (traditional) investing based on company fundamentals, totaling generally 10% or less of traded volume (to prove this out, compare the change in your 13-F’s from one quarter to the next to your total traded volume);
  • High levels of algorithmic (mathematical/machine) trading;
  • Speculation, or short term trading (while trading for volatility or arbitrage profits has always been a feature of buying and selling, today tiny spreads and trading incentives fostered by regulations have institutionalized speculation as a large and influential price-setting force.);
  • Transient capital that shifts easily and quickly between asset classes according to risk. Why? Because low-spread, electronic marketplaces encourage constant change.

How to make sense of these competing forces? Equity Analysis helps you understand what types of market behaviors are setting your price.

What is the “maker/taker” model?

It describes the system of incentives adopted by all the major stock exchanges and approved by the SEC through which shares of stock trade today. In many instances, traders can sell shares, or “make” liquidity, at exchanges for incentive payments of around 25 cents per hundred shares. Buying shares, or “taking” liquidity, produces an offsetting charge (the reverse of this fee structure exists too, at, for instance, the Nasdaq-owned Boston Stock Exchange, where traders are paid to remove shares and charged to provide them), of perhaps a penny more – say 26 cents per hundred.

From the 1790s until fairly recently, exchanges charged a consistent fee regardless of the transaction. Why have markets moved to a fee structure that changes according to activity? The idea was that liquid markets for all securities were best for investors, and so a scheme was devised to ensure that shares for every security would be available whenever someone wanted to buy or sell.

The maker/taker model was created. The problem with this structure is that it gave birth to “high frequency trading,” or the constant movement of shares from point to point in order to capture “rebates,” or the fees paid to traders for making liquidity to complete trades. What’s more, trades predicated on fees for simply being present do not represent the real, or natural, price of shares. Thus as maker/taker liquidity has come to reflect 60-70% of trading volume as we see today, there is great value uncertainty in the prices of traded shares across the market-cap spectrum.

What is high-frequency trading?

In the simplest sense, it’s the rapid turnover of small amounts of shares to intermediate the orders of other market participants. Consider it machine order-shuffling for minute profit by market intermediaries who view themselves as liquidity providers. Driven by “maker/taker” incentives to trade across various platforms and exchanges, these intermediaries “take the other side” of the trade, often moving the same shares back and forth between exchanges, alternative trading systems, and brokers. Frequently, these machines commit to no more than a hundred shares per security at a time and attempt to end the day “flat,” or without any ownership at all, even after accounting for the largest share of daily volume.

While “program trading” generally refers to computerized trading for a group of securities, and “algorithmic trading” refers to trading decisions made by computers using mathematical equations, in fact both are nearly synonymous today. In both cases, trading decisions incorporate instructions about price ranges, volume, comparative behaviors, the reactions of other participants, the costs and implications of trading decisions on the market and the portfolio of securities for which the trades are being executed, and macroeconomic data related to overall risk. Often, large or specialty broker-dealers execute these trades on behalf of their institutional trading clients, which may include rational/fundamental investors, risk managers and speculators.

What is a prime broker?

A prime broker provides bundled services to significant participants in equity and other markets. When investment advisors register with the SEC, they must specify legal counsel and a prime broker. Prime brokerage typically includes trade executions, capital for completing trades, margin accounts, custodial and securities-clearing services and market-making. The largest investment banks dominate prime brokerage.

Machines drive the majority of your stock’s activity. These forces determine values much more often than do fundamental factors now. If your knowledge base doesn’t include them, your answers to questions about stock price are bound to be wrong. Market structure offers a key way to improve interaction with the buyside – because trading costs and risk-management factor heavily into investment decisions now. Plus, exchanges are becoming global and electronic, and will soon provide full balance-sheet trading: bonds, currencies, options, futures, exchange-traded funds and equities on a single platform (this concept underpins exchange consolidation). These Reg NMS realities require IROs to understand trading in a way not necessary when the equity markets behaved differently.

Options are low-cost alternatives to buying equities, tradable securities in themselves, and an effective way to leverage returns from assets and hedge against risks. As in any asset market, be it real estate, cars or baseball teams, there is something valuable that can be leveraged and should be protected. Same in equity markets. Stocks are assets. Institutions today often attempt to leverage yield from assets rather than hold them for appreciation, because appreciation can’t be counted upon like it could in the past. In corollary fashion, assets are subject to greater risk of depreciation today, so institutions hedge risk. The well-informed investor-relations professional today must thus understand not just how company shares are valued by investors but how they’re used for risk-management or speculative purposes.

One of the best ways to observe these uses is to see what behaviors dominate during monthly options expirations and around index rebalances. By the same token, if risk-management and speculation dominate during options expirations or around index rebalances, contemporary IR pros will plan news and earnings around these dates rather than during them. We’ve created an IR planning calendar to help you plan around those times.