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What is High-Frequency Trading?

Shifting with a shake of the collective head to our matter this week, what is that this factor referred to as “excessive frequency buying and selling,” IROs and execs?

Nicely, it might be an excellent title for a rock band, however excessive frequency buying and selling is a sign of the habits of cash and a measure of market danger. It’s liable for 20-30% or extra of quantity presently. Virtually talking, it is continuous, tick-by-tick, high-turnover shopping for and promoting with real-time knowledge to regulate danger whereas producing returns from minute change. It is coming from all types of capital sources, however do not blame hedge funds alone. All funding advisors should put cash to work…and if they can not make investments it, they’ll deploy it in different methods. That is the easiest way proper now. (NOTE: Talking of which, search for cash to depart equities in pursuit of the Treasury Division’s ridiculous lending facility for high-risk credit score property as choices expire subsequent week. This won’t be good for fairness costs.)

Each Nasdaq OMX and NYSE Euronext introduced latest price modifications designed to attract “excessive frequency merchants.” In the event that they’re making an attempt to draw it, it is as a result of there’s plenty of it occurring, besides it is occurring elsewhere. Here is the telling function: each these exchanges made modifications to the price of CONSUMING liquidity, or shopping for, whereas protecting “rebates,” or incentives to offer liquidity (one other approach to say ‘providing shares on the market, which attracts consumers’) excessive.

This implies there are modifications at work within the broad markets. The place “rebate” buying and selling, or furnishing liquidity, is critical to serving to standard institutional traders like pension funds effectively purchase and promote giant portions of shares, excessive frequency buying and selling depends upon almost equal and offsetting shopping for and promoting in very small increments. That is the type of exercise presently dominating volumes (and why volumes are on the entire down, too).

What does this imply for investor relations? We have at all times had a moderately arcane occupation populated with phrases like steerage, and Reg FD and earnings name. Our skill to know ideas that usually make different peoples’ eyes glaze over is a defining mark of the investor-relations skilled. Nicely, guess what? It is occurring once more.

All this high-frequency buying and selling implies that a lot of the cash transferring your worth and quantity sees excessive fairness danger and research equity-markets habits, not enterprise fundamentals. This has been occurring for a while nevertheless it’s getting worse and worse, and it isn’t going to get higher anytime quickly. Subsequently, IR of us, it is time to add this information to your repertoire. In spite of everything, any individual’s gotta know what is going on on on the market – for the reason that SEC apparently would not – and it’d as effectively be us.

Look, we’re purposely aiming to make you chuckle right here. However I hope you may keep in mind this: effectively greater than 80% of American corporations (and roughly an equal variety of European corporations) maintain earnings calls. But elementary funding is accounting for about 15% of quantity at finest. Hadn’t we higher perceive the remaining? We predict realizing market construction is as essential to IR now as earnings calls.

And it should not price you rather more than your earnings calls, both. Whether it is, you are paying an excessive amount of. IR departments do not want costly, outdated instruments that do not work in trendy markets.

Source by Tim Quast

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