September 19, 2012

You Never Know

An ode to erudition in professional sports, these pearls of wisdom overheard on sidelines come thanks to ESPN’s halftime report during the unfortunate demise of our Denver Broncos in Monday Night Football:

“If you hadn’ta been where you was, and did what you did, we wouldn’ta got what we got.”

“You can sum it up in one word: You never know.”

“You never know” is a good way to describe markets. And reason why market-structure analytics are essential to IR. Paul Rowady at TABB Group, the top market-structure authority today, wrote extraordinary commentary at TABB Forum yesterday saying monetary intervention by central banks poisons market data.

What’s the real price of your stock? As you ponder, Rowady says, “At any moment in time, one could argue that there simply cannot be true price discovery in any market where intervention occurs – which is most of them.”

Why? Because central banks, unlike the rest of us participants, can use unlimited money and unrestrained access to information – the Federal Reserve is not bound by “insider trading” constraints like you – to affect prices of every asset, every commodity, every currency.

Rowady writes: “Consider that algorithmic trading is little more than pattern recognition. Patterns are simply manifestations of consistent behaviors. The behaviors of market actors left behind in the data – like so many clues – represent the patterns that automated methods are designed to home in on.”

That’s right. We see it and go even further, defining the kind of behavior and its share of your volume. When the Fed tromps through your equity market, data and patterns are rendered uncertain. At times, Rowady observes, what remains are “only those that are stuck there by internal mandate, like an indexed fund; or by limitation of design, like an automated market-making or latency arbitrage program.”

Before you spit for frustration like a ballplayer, thinking what’s the point of IR then? there’s a happy ending! The IR job at times is about offering peace of mind to management through good information.

Want to know your real price? It’s your Rational Price. It may go weeks without changing. What is it? Come join us by web meeting (room for 15), and we’ll spend 15 minutes explaining and leave 15 more for questions. If there’s interest, we’ll take another topic next week, like measuring Sentiment. Join us (click through) today (9/19) at 4p ET by GoToMeeting. Log in at meeting time to join.

And remember, if you hadn’ta been where you was, and did what you did, we wouldn’ta got what we got.

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