Is Today’s Market Structure Threatening to Make the IRO Extinct?

28 September 2015

By Adam Frederick

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This past Friday I was lucky enough to sit on a panel at NIRI-Chicago Annual IR Workshop. The purpose of this particular discussion was to examine the current market structure. Specifically, we looked at how things like High Frequency Trading (HFT), Algorithmic trading (Algos), Reg NMS, and the proliferation in options volume and its usage by Activist investors, have all contributed to create the market in which we live in today.

markets

Specifically, we covered these topics on the panel:

  1. how IROs are currently utilizing intelligence, data sets and other solutions available to them

  2. the use of options and derivatives as significant sources of analysis; and

  3. to consider the question, ?Given all the recent changes to market structure, is the IRO in danger of becoming extinct??

First, on the idea of changes in market structure, and how they have caused a shift in intelligence offerings to the IR Community – my belief is that it is no longer a luxury, but rather a necessity, that IROs arm themselves with the very best in quantitative intelligence. IROs require intelligence that is driven from big data analytics, to provide predictive analysis on investor expectations, forward-looking sentiment, proactive C-Suite communications and Activist activities.

We have certainly noticed a paradigm shift amongst IROs whereby the limitations of the information provided by the legacy approach to stock surveillance (aka starting at settlement) simply no longer suffices. Given the stark difference between market structure of the late 1990s to the early 2000s, and today, the leaders in investor relations are demanding more quantitative analytics, along with actionable, forward-looking intelligence.

As our discussion moved on to the topic of options, as it relates to equity options trading by institutional investors, hedge funds, and activist investors, we illustrated how this has become the ?norm? rather than the exception over the past decade or so.

In fact, since 1998, total equity options volume has grown by a net 963%, while overall equity volume on the NYSE has increased just 48% over that same timeframe. Furthermore, since the Financial Crisis of 2008, options volume has increased by a net 21%, while NYSE equity trading volume has dropped by 50%. We now see more and more cases where activist investors such as Carl Icahn, Pershing Square, JANA Partners, etc., are gaining control of Board seats, and affecting change upon companies, almost entirely through the purchase of options contracts ? rather than buying the common equity shares outright.

volumetrends

IROs can no longer afford to take a head-in-the-sand approach to options trading. To be effective, IROs require actionable, easy-to-understand intelligence from this seemingly nebulous market.

Finally, we addressed the question as to whether or not IROs are in danger of becoming extinct. This is certainly a valid concern and a pertinent one to all stakeholders (yours truly, included!) within the IR Community.

My thought is simply that times have changed, and as such IROs are forced to change as well. I believe IROs must actively convert their role from one that has traditionally centered on the financial and communications side of the company, to more of a Stock Price Strategist. Given the complexities surrounding trading today such as: the ever-increasing volatility, quick, seemingly unwarranted price fluctuations, HFT, Algos, use of options, increase in activist campaigns, etc., IROs must be more prepared than ever to intelligently answer the questions posed to them by senior management regarding trading and its effects on both short-term, and long-term enterprise value.

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