Hey manf...er, pal. It's a long moniker, you understand. :)
Well, Keith is right: firms pay for order flow. But the assertion that there is value provided by the informational component of such order flow is absolutely correct.
First, and obviously, there is value in the ability to see the money flow into and out of particular securities (equities, fixed income, etc.) or in specific issues (ABCD, XYZ, etc). With the exception of institutional orders (which are large and usually handled manually when they require capital committment) much of this analysis takes place after-the-fact due to the large part that automation plays in capturing and executing order flow.
Thus, if a dealing/executing firm has a number of broker-dealer clients, each with a large customer base...and ideally when those bases range from the smallest retail to the largest institutional customers...it can derive a great deal of knowledge about market trends and investor sentiment.
Other order associated information may come into play as well: trends in margin vs. cash accounts; long vs. short transactions; the size of the average transaction; market vs. limit orders; and the like. In addition, the differences in the aforementioned factors between (typically) retail and institutional order flow sources might be analyzed as well...all of which, as previously stated, can give a dealing firm a good idea of where and what the trends are.
How it weighs and values that information is another issue. Some firms use the information gathered to confirm, or refute, economic/market forecasts. Others disregard it all together. But most often - as I have seen and heard - the observed data is utilized in particular by risk management personnel, credit committees, and research analysts (among others), largely 1. to come up with proprietary market research and indicators, and 2. to tweak the risk exposure of the firm's lending and trading departments in accordance with perceived sentiment and trends represented by the data.
Incidentally, another way in which large firms can glean terrific amounts of information regarding the money flow, sentiment, and general trends in the markets comes from owning correspondent clearing firms. Not from being self-clearing, mind you: from clearing for others. If you consider some of the large mergers and acquisitions in the securities industry over the last two or three years, it's often that the presence of a correspondent clearing subsidiary in the mix was a factor.
One reason why firms decide to clear their own transactions are when the economics of such (versus an introducing or omnibus correspondent relationship) become too compelling to ignore. Others do so...and a second reason for those who do so for economic reasons...is to avoid disclosing, to other parties, the above information.
The utilization of numerous executing firms - not to mention electronic venues - and the breaking up of large trades are other way in which some entities - particularly institutional ones - try to mask their actions from the statistic/data gathering of dealing firms/block desks.
LPS5 |
