Quantitative trading has become popular and successful because it manages risk through mathematical analysis of market structure. Results? Fundamental and quantitative investors alike regulate capital with programs, algorithms, structured products (trading strategies designed to maximize returns and minimize risk by capitalizing on market-structure change), crossing platforms…on it goes.
Here's is what we at ModernIR are observing: the act of investing is more and more the domain of private equity, while the practice of trading in pursuit of alpha (divergences from norms) and beta (the degree of divergence) is the prevalent form of "investing" today in the equity markets.
It almost seems that the Nasdaq and the NYSE, having absorbed Archipelago and Instinet (and BRUT), are essentially ECNs. Trades on what remains of the NYSE floor are driven by mathematics and execute in 200 milliseconds or less. High-frequency trading firms like Octeg (the equity trading arm of Getco LLC), Renaissance Technologies, Citadel Derivatives, Millenco and BATS Trading move billions of shares per month – often more than the global market's biggest equity program trader, Morgan Stanley.
Plus, Goldman Sachs, now the world's largest hedge fund, grew revenues 52% in 2006 to $38 billion and had an all-time investment-bank high net income of $9.5 billion (after paying out $16.5 billion in bonuses) principally on the strength of trading operations. And Fidelity is among the largest algorithmic traders. Any wonder why?
So IROs, if you're still practicing investor relations the same old way, you're ill-equipped for Reg NMS markets. You gotta know your equity market structure. If you don't, you're the only participant in your own market who doesn't.
If you conduct your IR program – messaging, shareholder-base goals, outreach, measurement – without considering market structure, you're neglecting a key facet of what drives your external target market's decisions. Risks? Inaccurate answers about why your equity appreciates or declines. Wasted time on outreach and messages inappropriate for your market structure. Ineffective measurement of your Investor Relations program. Net effect: Reduced value at the management table, less functional relevance.
"But we focus on the business and let the stock take care of itself." We hear this a lot. Investors will always follow the cash…that's why they're pumping literally trillions into private equity. So consider going private or accept that the short-term nature of today's equity markets is at odds with altruism. Then add to your skills by learning the new key value drivers embodied in market structure. IROs, the Street isn't what it used to be. If you – and your management team – want to navigate today's equity market with calm confidence, you must cozy up to market structure and make it work for you.
