What is High-Frequency Trading?
Moving with a shake of the collective head to our topic this week, what is this thing called high frequency trading, IROs and execs?
Well, it would be a good name for a rock band, but high frequency trading is an indication of the behavior of money and a measure of market risk. It is responsible for 20-30% or more of quantity currently. nearly speaking, its constant, tick-by-tick, high-turnover buying and selling with real-time data to control risk while generating returns from minute change. Its coming from all sorts of capital supplies, but dont blame hedge funds alone. All investment advisors must put money to work…and if they cant invest it, theyre going to deploy it in other ways. This is the best way right now. (observe: Speaking of which, look for money to leave equities in pursuit of the Treasury Departments ridiculous lending facility for high-risk credit assets as options expire next week. This will not be good for equity prices.)
Both Nasdaq OMX and NYSE Euronext announced recent fee changes designed to draw high frequency traders. If theyre trying to attract it, its because theres a lot of it going on, except its happening in other places. Heres the telling characterize: both these exchanges made changes to the cost of CONSUMING liquidity, or buying, while keeping rebates, or incentives to provide liquidity (another way to say offering shares for sale, which attracts buyers) high.
This method there are changes at work in the general markets. Where rebate trading, or furnishing liquidity, is necessary to helping traditional institutional investors like pension funds efficiently buy and sell large quantities of shares, high frequency trading depends on nearly equal and offsetting buying and selling in very small increments. Thats the kind of activity currently dominating volumes (and why volumes are on the whole down, too).
What does this average for investor relations? Weve always had a rather arcane profession populated with terms like guidance, and Reg FD and earnings call. Our ability to grasp concepts that often make other peoples eyes glaze over is a defining mark of the investor-relations specialized. Well, guess what? Its happening again.
All this high-frequency trading method that much of the money moving your price and quantity sees high equity risk and studies equity-markets behavior, not business fundamentals. This has been going on for some time but its getting worse and worse, and its not going to get better anytime soon. consequently, IR folks, its time to add this knowledge to your repertoire. After all, somebodys gotta know whats going on out there – since the SEC seemingly doesnt – and it might in addition be us.
Look, were purposely aiming to make you chuckle here. But I hope youll remember this: well more than 80% of American companies (and approximately an equal number of European firms) keep up earnings calls. however basic investment is accounting for about 15% of quantity at best. Hadnt we better understand the rest? We think knowing market structure is as crucial to IR now as earnings calls.
And it shouldnt cost you much more than your earnings calls, either. If it is, youre paying too much. IR departments dont need expensive, outdated tools that dont work in modern markets.