The weather is hot in Florida and so are the sessions here at the NIRI ’09 conference.  Yesterday I tweeted live from the “IR Emerging Issues and NIRI Advocacy” session.  The second session entitled “How the Buy and Sell Side Trade Your Stock Today”, was so hot, that I decided to put together some notes and compile for this blog.

This session was designed to help IR professionals understand what happens behind price and volume.  Here is an overview of what was said:

Moderator: Tim Quast – ModernIR

Panelists:

John Adam, Head of Issuer Service and Corporate Access – Liquidnet

Brian Barrett, Senior Trader – Franklin Templeton

Anthony Corso, Managing Director at Agency Trader (head of trading operations) – Rosenblatt Securities

Bryan Harkins, Head of Sales & Strategy for Market Center – Direct Edge

Joe Saluzzi, Partner, co-founder and co-head of equity trading – Themis Trading

Moderator: Looking back 10 years, if an institution wanted to build a position in a company how would they do it?

Anthony: Communication and transparency.  However these days there is a lot of fragmentation – for example there are a lot of new exchanges; information is difficult to aggregate; price discovery mechanisms have changed; participants have grown exponentially with mutual funds, institutional, professional investors and day traders making up the landscape.

Moderator: Brian can you give us a run-down of how you would accumulate a position of $50 million in a $5 billion market cap. company?

Brian: Not much has changed for us on the buy-side; we would accumulate in a way that would have the least impact pricing on the portfolio – try to buy or sell a position without moving a stocks price. In general, the buy-side wants to make it harder for the sell-side to see our position.  Evolution over the last five years has lead to fragmentation: that means smaller blocks being traded through high frequency traders.

Moderator: Do any of the other panelists have anything to add?

Joe: I have seen character of volume change; through high frequency trading as these traders get paid a rebate from the exchanges to do buying.

Bryan: Decimalization (all stocks moving away from fractions to trading in penny increments) made it hard for traders to discern spread capture between the bid and ask as this task was taken over by computerized trading or liquidity providers.

John:  If a company’s stock is having unusually high trading volumes, those volumes may not be indicative of “true trading”.  What I mean by that is that these high frequency traders are creating a lot of noise.  So it is hard to separate out the institutional volume.  As such, dark pools were created to eliminate the impact allowing institutions to trade more efficiently.

Moderator: Okay, what about the sell-side?  What about Goldman, Credit Suisse – are they supporting issuers? 

Joe: Committing capital to make money through market makers and specialists are gone with the move to machines.

Bryan: Fragmentation and dark pools are new, but off-exchange trades (such as those traded via dark pools) are still occurring, through advanced technology.  Computers are now dominating the market but U.S. markets are now running more efficiently.

Brian: Dark pools were initially put in place for the buy-side, although doing a trade in there doesn’t mean there is somebody in there to do business with (i.e. if I am buying a block of shares, may not be a seller).  So there has been a recognition that they needed to be opened up to the sell-side.

Question from audience: How much transparency is there for dark pools?  Do you have to report a dark pool trade?

Brian: Yes – in the U.S. all of the trades aggregate and print through FINRA as soon as the trade is executed.  Conversely in Canada, dark pool trades do not print on the TSX.  Volatility has also lead to fragmentation and backing away from doing large blocks of shares.  Personally, I still look for liquidity and price points.  For example, when I start building a position in a company, I do a few things:

1. Quantitative Analysis – trade cost analysis: historical spread between bid and ask and how much the opportunity will cost?  Should we act now or wait and see?
2. Liquidity – not looking to make a footprint (transparency as well, but too much will trigger attention to volume of trading)

Moderator: So essentially due to high-tech evolution, there is no transparency of who is trading a stock?

John: Yes high frequency trading makes it hard to figure out what your investors are doing in the market.   So just because there is heavy volume doesn’t mean there is an institutional investor acquiring or selling off a large position.

Moderator:  Okay, let’s take some more questions from the floor…

Question1: At the end of the day my stock usually stabilizes, then right before the close there is a surge that seems to drive the price down – what is causing this?

Answer1: (collaboration from all panelists): well at the end of the day, the volume weighted average price gets calculated.  But based on our prior discussion you could surmise it is due to the high frequency trading coming in to through things off kilter.

Question2: So if IRO’s can’t determine who is trading their stock, how would we determine effectiveness of a roadshow?

Answer2: John: know your holders; since there has been a drop in sell-side coverage, should interact more with buy-side to gain sentiment.

Anthony: I actually have to disagree with John on this one – buy-side may not divulge what they are doing in market.  Should actually engage a good service provider to tell you where your stock is trading.

Question3: How would you judge the quality of data from surveillance providers that IRO’s/companies are paying for?

Answer3: John: Market is more difficult to understand true picture; again very fragmented.

Question4: What do you think of short-selling rule from Washington?

Answer4: Joe: well I disagree with it as the lobbyists there represent the exchanges and the exchanges are paying the rebates to the high frequency traders.

Brian: Buy-side and sell-side are going to start to consolidate to stop fragmentation.

John: There is a place for short-selling:

1. Part of an efficient marketplace
2. Rife in market to enable abuse

Although a lot of PM’s don’t want to loan out stock anymore especially in today’s market climate.

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