Institutional use of stock trading ideas set new records in the third quarter ended September 30, 2010, according to the Trade Idea Monitor (TIM). This is as opposed to trading volumes, which generally declined.
Sell side firms sent a record 204,679 new and closed ideas to buy side clients in 3Q10, up 6% from the prior record set last quarter, and up 64% from the year ago third quarter. New ideas recommend when to open positions; closed ideas when to get out.
The TIM reported a record net 700 firms around the world with live trade idea programs as of September 30, 2010, up 8% from 2Q10 and up 28% from 3Q09. About 75% are brokers developing ideas and 25% are hedge and quant funds and traditional long-only investment managers buying ideas.
The TIM's database of closed ideas as of September 30, 2010 totaled a record 1,194,172, up 15% from June 30, 2010 and up 70% from a year ago. The "idea base" is used by money managers to assess the historical performance of brokers for fundamental trade idea investment programs, or to develop quantitative trade idea investing models.
"In today's fragmented markets, the buy side is turning to their trading partners to help flag up possible investments and importantly also time investments and exits," explained Colin Berthoud, co-developer of the TIM. "Using the Trade Idea Monitor, fund managers can instantly determine market sentiment on a stock or sector. Over-worked portfolio managers are generally unable to research every investible stock in their universe. Trade ideas fill the gap."
During the quarter, short recommendations represented an average of 36% of all new ideas versus 33% in the second quarter and 35% in the year ago quarter. The short percentage rose through the quarter, from 34% in July to 37% in September. More than 33%, which means more than one short for every two long ideas, begins reflecting increasing caution about the market.
Closed ideas accounted for 50% of all ideas during 3Q10, similar to the second quarter and last year. More than 50%, which means closing more positions than opening new ones, also starts to reflect a higher degree of caution.
Unlike traditional sell side research, trade ideas are client specific, based on how the market is likely to value a stock now (not next year), and suggest how much should be invested. Brokerage firms only develop ideas for those clients who agree to pay, typically on the basis of alpha generation (outperformance versus the most relevant index).
