You know it’s nearly Christmas because the 12 Days of Trading team is back; and there's a tower of mince pie boxes in the foyer of your local supermarket. Although to be fair they have been there since last August. Now in our 8th year of festive charts we bring you a light hearted review of the year and a nutmeg flavoured taste of our favourite topics.
Meanwhile at home we’ve been chatting about the thorny subject of Christmas Presents again. As we’re all feeling the grinch a bit this year, Mother suggested asking the AI for some advice (she’s very good on the computer!). So after three hours of prompt engineering, she came back with the idea of collecting all the various vouchers we’ve left around the house. It’ll be socks again for sure, but at least they’ll be cheap.
It got me thinking; a voucher is a bit like a convertible bond. You spend some money and get the right to buy something cheaper a little later. A case in point is Pirelli’s convertible bond issue which is gaining a lot of attention at the moment as it approaches maturity on December 22nd, and is close to the money. In today’s chart we show how market volumes are responding as the share price flirts with the conversion price.
On two recent days, November 27th and December 3rd, the shares traded 2x and 4x more volume respectively than the period average of 32M€, with December 3rd being 122M€ (86% of the September rebalance). A unique aspect to this story is how dark liquidity grabs a huge slice of the cake on both days (unlike the rebalance where the focus is on the auction).
The shares had been trading above the conversion price for most of the last few months. When an issue is in or near the money, it signals the shares are on a good trajectory and even though a CB is dilutive it attracts interest. Meanwhile hedgers are selling shares more actively to manage their deltas. There is a push-pull at play which is exciting to watch (and maybe contributing to those big dark venue matches). What will happen once the CB matures? This increased participation across the board shows up in the volume figures and the trend.
It’s another great example of how important it is to measure and monitor accurate, representative liquidity as a measure of trading and investor activity - as an alerting mechanism (maybe to keep an eye on the volume curves) and input to investment decision making. Just like in the case of index reconstitutions, activity begins long before the event, providing further signal. Pirelli is again a case study as this additional liquidity could help it into the Italian large cap index; with further potential for momentum created by ETF and index inclusion.
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