Stock Surveillance: The most important tool in your toolkit
12 May 2017
By Rana Abdel Fattah
Today’s market environment is complex, with trades measured in milliseconds and volatility always fluctuating. Order flow is increasingly fragmented, and high-frequency traders and dark pools are making the market more opaque than ever.
In the past, specialists or designated market makers could provide IROs with some colour around trading; this is no longer the case. The granular visibility is gone, as only a fraction of any company’s shares actually trade on an issuer’s listed exchange.
Algorithmic traders, the rise of alternative exchanges, an increase in international trading, and advances in technology are making lightning-fast trades possible. While technology is almost certainly responsible for much of the markets’ upheaval, it’s also handing IROs a perfect tool to level the playing field: better and more sophisticated stock surveillance techniques.
Whether improving shareholder visibility, preparing for earnings, preemptive detection of activist trading, or building credibility with the C-suite and board, surveillance providers have changed the industry landscape by providing IR teams with unprecedented visibility – and the tools to take action on what they’ve learned.
The power of real-time data
“There are going to be several reasons why your stock trades up and down on any given day – and surveillance can help you make sense of that,” says Julie Tracy, Senior Vice President & Chief Communications Officer, Wright Medical Group. Within our current fragmented and opaque markets, where algorithmic trading dominates daily volume for most stocks, the seemingly straightforward query, “What’s happening with our stock?” has become one of the toughest questions for an IRO to answer with certainty. Surveillance filters out noise to bring clarity to the markets, letting IROs know which orders originate from those institutions looking at company fundamentals and which are products of HFT, ETFs, sector-based rotations, indexers, or passive strategies. Beyond noise filtering, surveillance provides IROs with comprehensive and objective insight that cuts across three key intersecting dimensions: sentiment, real-time data, and volatility.
Activist early warning system: Be pro-active vs reactive
Activists target a specific company for one reason: economic opportunity. Through their involvement, they think they can generate out sized returns on their investment. Research points to the fact that shareholder activism is on the rise. In 2015, for instance, activists launched 420 campaigns against U.S. companies, according to FactSet and PwC. Nearly two thirds of those activist campaigns involved a dissident slate of directors and an attempt to wrest control of the board. However, an informed and sophisticated options monitoring effort, combined with state-of-the-art stock surveillance, can provide an early warning signal when activist funds are accumulating a position. As a result of the ability to predict activism, IROs, senior management, and boards, become empowered to prepare for activism in advance.
Prepping for earnings and other investor events
Day-to-day communication with investors and the preparation of management for industry conferences or non-deal roadshows are boosted by surveillance, which informs both preparation and post-event actions for major announcements such as earnings or an M&A transaction. Ongoing monitoring of ownership positions and market sentiment/expectations sets the stage for any major corporate announcement, and can be broken into five distinct phases: monitoring sentiment, anticipating market reaction, post-event action plans, evaluation and feedback, and messaging. Know your audience is the foundation of effective communication, and surveillance provides IROs with the insights they need to meet the challenge.
Targeting: At home and overseas
Targeting investors outside of one’s domestic market raises challenges for IROs that surpass distance and culture. However, a sophisticated surveillance and targeting program can overcome these obstacles for IROs who wish to expand their company’s global outreach. Within this notion, surveillance becomes exceptional tool at helping them gain more clarity and insight into prospective overseas investors.
Download our latest whitepaper Stock Surveillance: How to leverage new technology for maximum visibility and learn how stock surveillance has evolved to meet the challenges of today’s IROs, including the rise in activism, the analysis of larger data sets, and incorporating surveillance into daily workflow.