Todd Abrahall explains how to get the most out of market makers
Q: As market structure gets more complex, it gets harder to understand what’s driving the trading activity in my stock. What should I be paying attention to? As we’re NYSE-listed, what kind of information can we get from our designated market maker (DMM)?
A: There is no doubt that market structure is evolving fast and IR professionals everywhere are hungry for knowledge and fresh perspectives on their listings.
Two current areas of focus include holistic market intelligence and increased clarity around the effect financial derivatives – namely, exchange-traded funds (ETFs) – have on stock trading.
Equity trading in the US is spread across many trading venues. There are traditional exchanges like the NYSE and NASDAQ, and alternative trading systems known as dark pools, where institutional traders can trade large blocks of shares anonymously.
As a result, there is a multitude of places for shares to trade, and all of them play a role in your company’s share price.
Under this structure, obtaining meaningful market intelligence requires looking at the entire market. In the same way they used to turn to their NYSE specialist, many IROs now find their DMM has valuable insights in this area.
IROs must also be mindful of the role ETFs play in today’s markets. The correlation between share prices of companies within the same industry group has tightened as trading volumes in ETFs have spiked.
Smaller firms have been most affected, with some reporting that more than 60 percent of their average daily volume is driven by ETF trading.
This is evidence of a noteworthy shift in the ETF universe. While the value of ETFs is theoretically derived from the prices of the underlying securities, in many cases it’s now the other way around: ETFs are beginning to drive the value of their underlying securities.
As a result, IROs need to understand the role ETFs and other derivatives are playing in the markets so they can communicate with investors and their management about trading activity. Many IROs are turning to DMMs to help them analyze ETFs.
Evolving out of the old specialist system, today each NYSE listing is assigned to a single DMM, giving the IRO a central point of contact. Each DMM company’s corporate relations team contributes to the development of a complete picture of trading activity in its assigned symbols.
DMMs communicate regularly with IR teams to keep them apprised of market developments and serve as a critical source of market intelligence in an increasingly complex environment.
Firsthand market intelligence can be especially valuable during times of heavy trading volumes or important macroeconomic events that cause spikes in overall market volatility. For NYSE-listed companies, assistance and clarity are often only a phone call away.
Todd Abrahall, head of designated market maker services for GETCO.
