What a wild week in the markets. Exchange volumes boggled the mind on Wednesday January 24th – and they weren’t driven by fundamental investors executing buys and sells. So let’s talk briefly about global statistical arbitrage and what it means from (or to) the comfort of your IR chair.
Have you ever wondered why on one day Asian investors cheer US Federal Reserve policy and the next, jeer it? Or why European investors one day zig with US markets and another, zag inversely against them? Market observers and 24-hour news pundits often attribute these curious, seemingly bipolar activities to juking and jiving investor sentiment: “Markets rebounded today on renewed enthusiasm over Fed policy…”
You’ve seen it, right? Well, we submit that most of the time it’s no such thing. Rather, we believe this thrashing can be attributed to global statistical arbitrage, or in the simplest of all terms, the efforts by traders to take advantage of minute speed, time-zone and informational inefficiencies at various planetary market entry points.
Why should you care, there in the IR chair? (That rhyme would work well in an official investor relations ditty.) One big reason, so you have answers when your execs and board members wonder why investors are selling shares of a business with outstanding fundamentals and economically resilient drivers.
How to arrive at the answers? Watch the NATURE of the participants in your market, whether you’re listed on the Nasdaq or the NYSE (both give you the means to do this). Note the trading activity of firms in context of global daily ups and downs. If the big Prime brokers, anonymous platforms and well-known arbitrage systems like Lime Brokerage, and ITG and Pulse Trading and on it goes, play dominating roles in your marketplace and lead your stock up and down…odds are, you’re largely a reflection of macroeconomic factors.
We’re simplifying of course. And, really, answers and knowledge can be remarkably precise, given the anonymous nature of today’s markets. Yes, it takes a little time, a bit of education…but you can increase your influence. We believe IROs have the capacity to exercise more influence now than ever.
Then sometimes, you must remind the hand-wringers that it’s best, to use what may seem a mixed metaphor, to allow smoke to clear before opening fire.
