What a blast we had in the high country skiing last week! But now, East Coast, we here in Denver would like our snow back, please.
Everybody’s got an opinion on why the market is yinning and yanging. We, I believe uniquely in IR, look at market structure first. That is, we see the trading data and behavior, and then from it we ask, “Why did that happen?”
Most everybody looks at what happens and infers that these are the causes for market activity. But, here’s the thing: money moves for three reasons today – investment behavior, speculation, and risk-management. It’s easy to get it wrong from the outside looking in. Thus, we think there’s greater accuracy in drawing conclusions from the evidence than in applying the evidence to your conclusion.
We saw a large rift form in the equity markets on February 2. Trading and investing activities were subordinated to risk-management flows. These are orders managed by software systems that respond to instructions and data about market risk. It may have been prompted by Greece’s problems. Perhaps American jobs data, or central bank woes in Argentina, where inflation was 17% in 2009. Maybe something else.
But that would be looking in from the outside. Inside looking out, here’s what happened: Systems executing orders for defensive reasons rose up in mass. It’s like a crack in the continental crust that squeezes out the stuff that forms mountains. Except here, it was risk-management volume – both buying and selling – that extruded from the rupture. When it ripples through nearly every issue like a fault line, you may be fairly certain it’s macroeconomic, not about your stock or story.
In fact, from the completion of monthly expirations on Jan 20, to February 4, we saw strong indications of risk management trading. It was similar to what we observed on October 1-2 last year, when the markets nearly fractured, and akin to the “healing” volumes in March and April 2009.
There are certain entry points where these volumes can be found. Among them is Goldman Sachs. When GS appears with large volume increases in 80% of issues (but you won’t see it in trading volumes), it’s a curious thing, and it affects all other behaviors. If you try to isolate whether it’s buying or selling, it’s impossible. All programs do both. So it requires seeing the activity in relation to other activities in order to understand what form of behavior has changed conditions in the markets.
Goldman isn’t alone. In fact, most times these volumes hit the markets through “sponsored access,” one of the activities that the SEC considers a gateway for exploitation. We don’t know if that’s true or not. We do know that in three different significant instances in the past twelve months, sponsored access has helped the markets heal.
We call these events “synthetic weaves” in the markets, stitching up a gash in the market structure. It leaves big question marks. Who’s behind it? Where is the money coming from? Why does it buy and sell seemingly unrelated issues en masse? Is it helpful or hiding a chasm ahead?
We can posit ideas in response, but who’s to say? We surmise, however, that economic data are secondary to the supply and pricing of currencies. And we can think of only one force with that sort capital capability.
Why does it matter? It’s a great way to clear the crowd out from around the water cooler. People quickly go quiet and start glancing at their watches when you let drop “synthetic weave in the equity markets.” Also, it helps explain why your business isn’t properly valued by trading markets.
