News And The Practices of Program Traders

The first full month of 2008 has passed and with it, the initial performance benchmark for traders and portfolio managers. There is a lesson here for investor relations departments regarding month-end portfolio lock-ins and a point to consider if you have news to announce, IROs.

We have previously talked about the disservice you may do your shareholders if you radically alter the information equation around options expirations. This also applies to transitions from one month to the next. Just as some highly successful trading firms – Citadel Derivatives and Renaissance Technologies come to mind – employed “outside the box” thinking (how I despise that tired phrase, but it’s still more descriptive than alternatives) including principles of mathematics and geographic formation rather than, say, financial-markets conventions, so must the effective and proactive IRO of today consider how news at the beginnings of months may affect available liquidity (the major concern in the markets today).

Month-to-month, programs behind trading strategies typically undergo tweaks and updates. We are seeing those effects today in the markets, for instance, with programmed adjustments to indexed vehicles and asset-allocation models taking effect and pushing the indices down. This means there is an overall reduction to equity positions occurring in early February and an increase in derivatives trading, a condition likely to prevail until four days before options expirations.

Suppose you had news to report about products, or contracts, or cost-cutting efforts and so on. As a rule of thumb, it’s better to wait about three trading days into the new month – when and where disclosure flexibility allows – to release these items. Doing so gives investors a chance to absorb additional information and appropriately incorporate it into risk-management strategies (everybody uses them, not just hedge funds). If you don’t, you may wrinkle the math behind them, which could result in greater hedging and reductions to equity positions (which are simply assets that derivatives strategies “insure,” we might say). Why do your shareholders unintended ill when you have the flexibility to avoid it?

Of course, it’s not always possible. But when you have leeway, it’s simply part of responsible investor relations in Reg NMS markets to consider the ramifications your news may have on risk-management strategies. This is yet another reason why Investor Relations Officers belong at the strategic table.