First, let’s take a look at the markets for the initial week of December 2007. From our analysis it appeared that fundamental investors were most active December 4th, while trading lightened considerably by the 7th and carried the telltale signs of massive risk-management and hedging. For investor relations, this means real investors finally followed traders into the maw – we’ve not seen much of that in the past couple months – prompting everybody else to take out insurance on their equity positions. No fund manager wishes to be caught out in the open on a Friday nowadays.

Of course not. However, a few points are worth considering.

Part of the explanation to management for continued volatility is, to use an analogy, like a junior high classroom before the last bell of the day: everybody’s there because they have no choice. But the moment that bell sounds, it’s a rush for the exit. Take the gentle whisper down from the Fed on overnight rates. The market responded by hacking 300 points off the Dow. Summary: Market structure at large is strung as tight as a junior high classroom just before last bell.

Speaking of market structure and analogies, let’s get back to transience and investor relations. Investor relations will never be and should never be a short-term endeavor. Pick your aphorism, from “acting locally and thinking globally” (and you mathematicians don’t jeer me with Diophantine equations, please. It’s a metaphor.), to “think short-term, act long-term,” and the point is that IR must evolve to encompass views of immediate events in order to grasp the big picture on why equities behave the way they do now.

If you doggedly persist in conducting your IR program altruistically, supposing that investors will simply follow your long-term business reasoning…well, as we’ve suggested before, go private. Because today’s public equity markets are no place for you.

If, however, you’re willing to adapt and take some measure of interest in the juvenile hyperactivity (no offense anyone, I’m tying up the analogy) that seems to punctuate both contemporary societal and capital behavior, we think you’ll enjoy your job a whole lot more and feel better about happenings in the short-term to boot – which is great for sleeping well at night (and if you do, so will your CEO or CFO).

With the USA out getting stuffed last week, volumes dropped by half in the sample pool.

Some things to consider. Three of Goldman’s trading desks made our Top 25 list of total issues traded, including its crossing platform and wholesale desk. Also Millennium Capital and other big derivatives desks made our Top 25 volume list. Wholesalers had nearly 9% of volume and liquidity providers had only about 15% of the total.

What does this mean for IROs? Short-term trading is very prevalent, while rotation from, say, growth to value isn’t happening. How can we be sure? If Wholesalers are buying and shelving more shares into inventory as market makers and the liquidity providers aren’t needed…elementary, Watson, buyers aren’t showing up.

On a positive note: Prime program traders were back above 30% of volume for the first time in November. Some support still came from algorithms, despite the present deplorable state of things for investors in US equity markets. We believe that there will continue to be significant algorithmic undercurrents in the US equity markets because traders can buy and sell securities in different currencies and perhaps capitalize marginally on spreads. And, at least for now, these will be run by traders, not investors. We’d prefer that it be otherwise, but as we’ve said before, algorithms are like the cash register of the equity markets – essential for transacting retail business. So we will have to be satisfied with what we’ve got.

Finally, the Wall Street Journal noted today that pension funds have been paring US holdings and will likely reduce overall allocations to US equities next year. This is something we’ve been observing and reporting to bigger clients for some time now. All the more reason to make your outreach to pension funds count. This means you have to know your market structure, so you can knock on their doors at the most opportune time. It’s not just story anymore, IROs, but market structure too, that swings the buyside pendulum.

Today, we’ll concentrate on what happened last week when the markets were shelled by broad-based institutional selling. Our sample data showed anonymous electronic order flow accounted for 42% of all trading Nov 5-9 and an astonishing 69% of volume on Nov 8.

What happened, why does it matter, and what’s to be learned, IROs?

Looking first at what happened, we believe institutions abandoned the orderliness of prime brokerage relationships where broker-dealers employ technology, access to liquidity and their own capital to control execution costs for clients and effect minimal impact on market structure. Instead, it appears that institutions connected directly to the markets in a nearly desperate effort to reduce exposure to equities. Whatever the reasons, the astounding role of anonymous execution platforms like Archipelago on Nov 8 was indisputable.

Why did it happen? Two reasons: First, we can’t overlook fear. Quantitative and fundamental investors alike are trading in four or five-day increments and making swift changes. Second, options set to expire this Friday, Nov 16 include currency and treasury futures as well as security futures.

With concerns ranging from the real impact of credit issues, to currency disparities, to geopolitical mayhem potentially rendering forward risk-management derivatives wildly out of whack versus underlying assets, institutions pared back the asset base. By forcing down stock prices through the simple act of selling, forward risks were alleviated because leverage relative to puts and calls ratcheted down. Interestingly, the REAL quad-witching next month on December 21 won’t include currency and treasury futures because they expire on Dec 14. So we had an unusual, but telling, day in November.

Why do these things matter, IROs? Because the chaos potential inherent in the equity markets’ great fascination with leverage these days may render fundamental factors like solid financial performance, new-product introductions, and whole-honed investor messaging impotent. Then you’re stuck explaining to management why your stock traveled the opposite direction of all your effort.

In short, today you need to know about these matters, and prepare to help marketing and operations teams adjust their timetables for better results from efforts. Sorry folks, as the old saying goes “it is what it is.”

One last note: a debate rages about whether economic or market peril looms. We do not deign to claim any expertise in economic data. We just look at trading data, because it’s the ultimate measure of investor sentiment. Pundits are reactionaries, while algorithms are real-time reflections of the mindset of the people behind them. We continue to have concerns about the role of short-term tactics in the markets – and the correlating risk to underlying equities if those hedges must suddenly and radically be reset.

We are constantly refraining the three reasons why market structure matters to IROs – right answers to questions, right places for IR time and effort, right IR measurements. Now, let’s apply options expirations to these hooks.

Last week marked monthly options expirations. We noticed that overall market structure changed in advance on Monday October 15. We also observed how European, Asian and American markets behaved like pistons, going up and down in small increments. Market gurus would have us believe these swings are manifestations of fear and greed tied to credit or economic concerns. Whether investors are engaged in continual bipolar reaction or not, we don’t think this explanation holds up under scrutiny.

Why does it matter to investor relations efforts? Because it’s important to understand the mind set of your shareholders – both long-term and short-term – if you’re to accurately answer questions, effectively expend effort and correctly measure results. Poring over data as we do, here’s what we think: Regulation National Market System (Reg NMS) in the U.S. markets has propelled the search for arbitrage beyond individual market centers onto the global stage (it’s not fully possible yet, but the data tell us it’s getting easier). This comes as no surprise. But the degree to which volume distributes among big American broker-dealers, and big European broker-dealers and Asian structured-products specialists is quite remarkable.

And no matter what traders may say, options expirations are like Santa Ana winds for equity values these days. Derivatives are very liquid and constantly in motion. Still, swings of a percent or two each day played out over a year…the opportunity for gains – and losses – is both alluring to investors and difficult to measure. It’s not 5-10% at a whack, but little pieces done fast and continuously. These actions impact availability of liquidity to fundamental investors, and the transactional nature of equity markets reshuffles sellside priorities.

If you want to be an investor relations star these days, you need to know this stuff. So to conclude, let’s go back to the three hooks.

Did your stock react to news or events – or to a derivatives imbalance? This goes to correct answers.

Which sellside shops moved your stock price, and when? That addresses how and where, and even when, you spend your IR time.

How did money – not volume – respond to your calls and one-on-ones? This goes to measuring your investor relations activities.

The truth isn’t in market structure alone, but if you don’t know yours, you’re taking big chances with all three of the hooks.

Tim Quast is a fifteen-year Investor Relations veteran and founder and managing director of ModernIR.com, which parses and categorizes over a half-billion shares per week with its trading intelligence system, Equity Analysis.