What is high frequency trading?

Moving with a collective nod to our topic this week, what is this thing called “high frequency trading”, IROs and executives?

Well, that would be a good name for a rock band, but high-frequency trading is an indication of money behavior and a measure of market risk. It is currently responsible for 20-30% or more of the volume. Practically speaking, this is continuous, step-by-step, high-turnover buying and selling with real-time data to control risk and generate returns from minute change. It comes from all sorts of sources of capital, but don’t just blame hedge funds. All investment advisers must put money to work… and if they can’t invest it, they will use it in other ways. This is the best way at the moment. (NOTE: Speaking of which, look for money to leave stocks for the ridiculous Treasury Department lending facility for subprime credit assets as the options expire next week. This won’t be good for stock prices.) .

Both Nasdaq OMX and NYSE Euronext announced recent fee changes designed to attract “high-frequency traders.” If they’re trying to woo you, it’s because there’s a lot going on, except it’s going on elsewhere. Here’s the telling feature: Both exchanges made changes to the cost to CONSUME liquidity, or buy, while maintaining “discounts” or incentives to provide liquidity (another way of saying ‘offer shares for sale, which attracts buyers’). high.

This means that there are changes in the work in the broad markets. Where “refund” trading, or the provision of liquidity, is necessary to help conventional institutional investors, such as pension funds, efficiently buy and sell large amounts of shares, high-frequency trading relies on buying and selling. nearly equal and offset in very small increments. That’s the kind of activity currently dominating volumes (and why volumes are generally down as well).

What does this mean for investor relations? We’ve always had a pretty arcane profession populated with terms like targeting, Reg FD, and earnings call. Our ability to understand concepts that often make other people’s eyes glaze over is a defining mark of the investor relations professional. Well guess what? It’s happening again.

All of this high-frequency trading means that much of the money moving in price and volume sees high equity risk and studies the behavior of equity markets, not trading fundamentals. This has been going on for some time, but it’s getting worse and worse, and it’s not going to get better any time soon. So, IR friends, it’s time to add this knowledge to your repertoire. After all, someone has to know what’s going on out there, since the SEC apparently doesn’t, and it might as well be us.

Look, our goal is to make you laugh on purpose. But I hope you remember this: well, over 80% of American companies (and about the same number of European companies) make earnings calls. However, the fundamental investment represents around 15% of the volume at best. Wouldn’t it be better if we understood the rest? We believe that knowing the market structure is just as crucial to IR now as earnings calls.

And it shouldn’t cost you much more than your income, either. If so, you are paying too much. IR departments don’t need expensive, outdated tools that don’t work in modern markets.