May 16, 2012

JP Morgan and Market Structure

Karen and I will join the ghost of Billy the Kid and about 3,000 cyclists in New Mexico next weekend for the Santa Fe Century. Weather looks good, winds below gale force. Should be fun!

Speaking of gales, JP Morgan blew one through markets. So many have opined that I balk at compounding the cacophony. My own mother is throwing around the acronym “JPM” in emails.

But there’s something you should understand about JPM and market structure, IR folks. First, put this on your calendar at NIRI National next month: EMC’s global head of IR, Tony Takazawa, is moderating a panel Monday June 4, at 4:15p, on IR Targeting and Investor Trading Behaviors (scroll down to it). The aim: Understand how markets have changed, how institutions have adapted, and what that means to gaining buyside interest today. I’ll be there, and we hope you will be.

Back to JP Morgan. You could define “market structure” in many ways. We prefer “the behavior of money behind price and volume.” What’s JPM got to do with that?

A lot. We observed in the days before word broke about trading woes at the big custodian for Fannie and Freddie that its program-trading volumes in equities were down by wide margins across the market-cap spectrum. It disappeared entirely from some small-cap clients that it typically trades algorithmically with great consistency (indexes, models, ETFs).

These facts raised no particular red flag because we saw widespread discordance in program-trading last week. Then word of JPM’s whale of a London loss broke. Maybe it was coincidental that its program-trading volumes fell. Regardless, it demonstrates the interconnected nature of markets today. Missteps in the risk-management arm of a bank can blight program-trading in health care, technology and other equities.

Also before the news hit, we saw a singular risk event marketwide May 8-9. Re-risking – balancing equity-risk exposure with derivative hedges – was measurable and visible in nearly every issue. The euro, we surmised. Market risk over currencies is grave now.

But it may have been a chain reaction. Declines across a set of algorithms could have triggered responses by risk-monitoring software for other banks and institutional investors. Picture one car braking on a crowded and whizzing freeway. Some stocks spiked, some plunged, some gyrated, some were dead calm.

And it wasn’t investment behavior.

Market structure matters to IR today. If you don’t have metrics for monitoring it, your management team isn’t as well-informed as it should be – and may be flying blind. Be sure to catch the panel at NIRI. We’ll talk about why these things occur.

Soberly, it requires no genius to grasp that a structure in which one party hedging a bet might disrupt the entire ecosystem is what the Brits would call suboptimal. Just remember: The market didn’t choose this structure. Structure was forced upon it through three little words: “national market system.”

Share this article:
Facebook
Twitter
LinkedIn

More posts

SPGlobal 2024 Capital Flows
February 5, 2025

“Really? That’s all the time you spent?” I said,”Yessir. It doesn’t take long to pull weeds.” I think I was twelve.  The mailman had suggested...

dreamstime m 135367887
January 29, 2025

DeepSeek would be a great name for a rock band. As would Rapeseed, an alternative offered by the helpful Whole Foods staff when I asked...

dreamstime m 6354515
January 22, 2025

A headline at Bloomberg from Jan 13, 2025, reads: I was a Wall Street Analyst. They are Irrelevant. The article by opinion columnist Shuli Ren...

dreamstime m 350316889
January 15, 2025
Public companies with traded shares need to stop selling horses and wagons to a stock market buying cars....
Public companies with traded shares need to stop selling horses and wagons to a stock market buying cars.
dreamstime m 116868429
January 8, 2025

We were in Nashville and Keith Urban wished us a happy new year. If you like country music, that’s a good start to 2025. More...

PXL 20240512 145600530.PORTRAIT
December 18, 2024

Willie Nelson plays Johnny Dean in the 1997 Barry Levinson movie Wag the Dog, who is hired to write a patriotic song as part of...