The new trading landscape

This fall, a group of IR professionals gathered in New York for a roundtable meeting to discuss the evolution of the trading landscape. The conversation covered topics such as the market dynamics that prompted investors to trade in dark pools, the role of high-frequency trading (HFT) – including the 2010 flash crash – and the implications for IROs as they search for information about their stock.

Fittingly, the roundtable took place at the offices of Liquidnet, a block-trading venue for the institutional investment community. Delegates from Liquidnet were on hand to provide information on how IROs can bridge the information gap concerning how their stock trades. IR magazine gathered some of the key points raised at the roundtable. The names of the participants have been removed to preserve their anonymity.

New trading venues

• The new trading environment is making it harder for companies to track the movements of investors in and out of their stock.

• IR professionals at the roundtable agreed that it has become more difficult to understand how their share register changes from day to day and to separate institutional trading activity from other activity in their stock.

• Investors now have access to many different trading venues, giving them the opportunity to conduct transactions quietly and at a lower cost than was previously possible. ‘On the flip side of that, it makes it tougher for people like us to know what’s going on,’ reported one IR professional in attendance. ‘My specialist is great but there is only so much he can tell me.’

• The new exchange platforms are all different: some cater to high-frequency traders that profit from small fluctuations in a stock price, others serve institutional investors, linking them together to execute large block trades quietly and anonymously. No two venues are exactly the same.

• Tools are available that can identify which trading platform different trades are taking place on. This in turn can help companies to differentiate between institutional trading and high-frequency activity.

• In the future, companies could become trading clients of dark pools in the same way that institutional investors are now. This would afford companies conducting buy-back programs or share issues the savings currently available to investors. ‘In effect, you would become an institutional buyer – or seller – of your own stock,’ explained one delegate.

High-frequency trading

• The rise of HFT has made it difficult for some IROs to differentiate the core institutional trading in their stock. Estimates suggest it makes up anywhere from one half to two thirds of the volume in certain, highly traded stocks.

• HFT creates a surfeit of noise that obscures the buying and selling activity of institutional investors. ‘You are basically trying to look through a lens, and in front of that lens is this hurricane of activity,’ said another attendee.

• Volume for volume’s sake is not a good thing, said IROs. They expressed concern about the fact that, on one particular day, Citigroup saw its trading hit 1.8 bn shares.

• Some roundtable participants argued that high-frequency traders should be obliged to stand in and make a market. ‘The market is in need of some regulation because it’s not to anyone’s benefit to have a giant amount of noise in there if the people providing liquidity in the market can just walk away any time they feel like it,’ stated one head of IR.

Changing sell-side model

• The unwinding of trading is sending ripples through equity research, where there has been an expansion of commission-sharing agreements, which allow investors to trade anywhere while setting aside cash to pay for research.

• This is helping to support the growth of boutique research houses. ‘What we are seeing is the independent analysts getting more attention, whether it’s on CNBC or elsewhere,’ commented one roundtable participant.

• While some attendees praised independent analysts as being at the cutting edge of equity research, others sounded a word of caution. ‘Their goal is to try to make a name for themselves, and they’re actually the riskiest ones for me,’ noted one attendee.

Conclusion
The proliferation of new trading venues, coupled with the growth of HFT, is making it more difficult to discern important movements in a stock. Meanwhile, the sell-side model is continuing to evolve and more resources are being allocated to voices in the independent research houses.

The permutations may end up benefiting IROs, however, if the results are lower transaction costs, better market intelligence tools for issuers and more credible research from the sell side.

About Liquidnet
Liquidnet is the premier institutional investment community, bringing together the world’s largest asset managers and public companies on a single network that directly connects traders, portfolio managers, analysts and corporate issuers.

Contact: Nicole Olson, Tim Landers, Brian McMahon
Email: research@liquidnet.com
Phone: +1 866 333 4977
Website: www.liquidnet.com