November 3, 2016

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Adam Frederick

How Today’s IRO is Leveraging Technology to Better Understand Market Dynamics & Stock Performance

Home > Product > How Today’s IRO is Leveraging Technology to Better Understand Market Dynamics & Stock Performance

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Ask any IRO which question senior management asks them most often, and they’ll likely say: “What’s going on with the stock today?” In years past, IROs had numerous tools at their disposal to obtain color on order flow from specialists, market makers, and to a lesser extent corporate help desks at exchanges.

Working with a surveillance provider that knew how to transform data into insight, the issuer could better understand whether stock price was being driven by stock-specific buy and sell orders, sector flows, or broad market trends. With this information at hand, the presence and impact of a large or aggressive institutional buyer or seller could be easily identified and quantified in real-time.

Unfortunately, today’s fragmented market has rendered those legacy sources all but useless. The vast majority of today’s volume trades away from an issuer’s actual listing exchange, and as such there is no longer a centralized source to obtain information about significant orders. In fact, exchanges — and the online tools they provide to their listed companies — provide little, if any, insight or color about trading.

 

Here’s the Good News…

 

Advanced analytics have emerged — and they draw on sophisticated algorithms that digest market signals, trading alerts, and mathematical finance theory to deliver a discreet, reliable picture of trading. By employing these technologies, today’s innovative surveillance platforms have filled the void left by the disappearance of floor specialists and human market makers. IROs can now gain insight — in real-time — into what portion of their volume and price performance is:

  • specific to their company’s stock
  • tied to peer activity
  • related to sector or industry flow (including index and ETF-linked positioning)
  • dependent on broad market/macro flow

Below we will look at some of the ways IROs are using advanced trading analytics to solve problems and take action.

 

1. Leveraging real-time trading insights

PROBLEM

A company’s stock is trading fractionally higher on the session but is relatively lagging compared to its peers in the absence of a specific news catalyst, leaving the IRO with no clear indication of the reason for underperformance.

SOLUTION
Advanced surveillance models examine the drivers behind volume and price performance, and uncover that stock-specific order flow is having a negative impact on pricing. In other words, while the stock is trading higher today and on the surface “all looks good,” analytics reveal that a long-only institutional shareholder is flooding the market with supply. This added supply is cutting into the stock’s gains and is causing the stock to underperform its peers on a relative basis. In working more closely with their surveillance provider, the IRO is able to precisely quantify the magnitude of the selling and is provided with a short list of probable candidates.

ACTION
Armed with the benefits of working closely with an experienced analyst, understanding the situation and the insights into the stock’s performance, the IRO constructs a solid narrative for their management team and board. The IRO dissects and interprets trading information in real-time and transforms it into actionable intelligence.

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2. Managing shareholder expectations

PROBLEM
An IRO is prepping for earnings next week and is concerned because the company’s numbers are going to miss expectations, and it appears that guidance is going to be considerably light.  

SOLUTION
Forward-looking analytics inform the IRO ahead of time that traders are positioned bullishly heading into earnings, and they can expect a rather benign market reaction. In other words, traders are placing their pre-earnings bets on the premise that the path of least resistance is to the upside, but overall there is to be a muted reaction to price movements. While certainly not the news they had hoped for, this intelligence provides the IRO with invaluable information, allowing them to forge a strategy to best prepare (rather than react) for a worst-case scenario.

ACTION
The empowered IRO proactively communicates reliable intel to senior management, and effectively controls communications with other key stakeholders. Fully aware that investors will be surprised by the miss and downward guidance and rushed to reposition, the IRO formulates a crisis management action plan. Working with senior management, sales and marketing, and other key shareholders, the IRO pro-actively develops key messaging, remarks for the sellside and top institutional shareholders, and begins to re-engage with prospective shareholder targets.

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3. Accurate targeting solutions

PROBLEM
An IRO has just been sent a list of potential investors to meet with their management team throughout their upcoming NDR, but sellside firms — gatekeepers between issuers and the buyside — are not always privy to the most up-to-date institutional holdings and investor trends.  

SOLUTION

For those IROs who are backed by the power and resourcefulness of new-age surveillance tools, finding the right buyers in a timely fashion is easily accomplished. By scouring mountains of big data from global exchanges and institutional datasets, as well as running continual analytics against trading in your stock and that of your closest peers, next generation surveillance provides IROs with extremely accurate and objective targeting solutions. No longer are IROs relegated to running a screen against a stale data set to view, “Who owns my peers, but not me?” Today’s tools take into account portfolio characteristics, real-time sector flows, and global institutional trends to match the right investors with capital ready to deploy with the right issuers.

ACTION
Comparing the sellside firm’s NDR agenda with the detailed targeting list from their surveillance provider, the IRO suggests names to add and discard from the original list to senior management. This helps to maximize senior management’s time putting them in front of the right investors, at the right time and provides a much greater ROI on the IRO’s marketing and outreach efforts, ensuring better alignment to shareholder value with the IR function.

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With these newly developed metrics at their disposal, today’s IRO is better suited to manage — in real-time — everyday challenges and the changing dynamics of their company’s shareholder base. Surveillance rooted in scientific rigor, fully backtested and objective in nature supports decision-making about investor communication and targeting, while simultaneously providing IROs and management immediate answers to critical questions about stock price movement and relative performance.

Adam Frederick

Written By Adam Frederick

Adam Frederick is the senior vice president of intelligence at Q4 Inc. and blogs regularly about surveillance and its applications for IROs.

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