Trading Activity and Spreads

 Economy, General Interest  Comments Off on Trading Activity and Spreads
Mar 272020

From the Wall Street Journal Today

Traders make money when the market moves. All they have to do is be on the right side of the market. Its like leverage, when you are on the correct side of the fulcrum you can make a bunch of money. On the other hand, if you if you are on the wrong side, it gets bad very, very quickly!

Certainly we have had plenty of activity and very big changes. The result has been the wide bid-ask spreads per the following chart.

High-Frequency Traders Feast on Volatile Market By Scott Patterson and Alexander Osipovich
Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.” High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile. Virtu Financial, one of the largest high-speed traders, last week said it expects to post trading income of between $509 million and $519 million in the first quarter, more than double the amount from the same period last year and its highest quarterly trading income since the company went public in 2015. Virtu’s results are “a quarter for the record books,” Piper Sandler analyst Richard Repetto wrote in a note. Virtu’s stock is up 42% this year while the S&P 500 is down 19%. The only other publicly traded high-speed trading firm, Amsterdam-based Flow Traders, is up 22% year to date. High-frequency firms have struggled in recent years amid a period of low volatility and steadily rising markets. Still, they are estimated to account for around half the trading volume of the U.S. stock market, having largely replaced the floor traders who once controlled exchanges’ ebb and flow. Virtu is a designated market maker for the New York Stock Exchange. Like market makers, high-speed traders often make money on the difference between buy and sell orders, known as the spread, by selling high and buying low as stocks tick up and down. Spreads in heavily traded stocks, such as Apple, which are typically 1 or 2 cents, have ballooned to 30 cents or more in recent weeks because of the highly volatile, fast-moving markets. While wide spreads indicate riskier market conditions, firms that can exploit the difference can earn sizable profits. Some plain-vanilla rapid-trading strategies are also faring well, traders said. “Our traders are having some of their best months in years,” said Dennis Dick, a trader at Bright Trading, a Las Vegas broker dealer that provides computer-driven trading platforms for day traders. He said one of the strategies that has worked best is “selling the rips and buying the dips”—selling stocks after big moves higher and buying after sharp downturns

Recovery – When, How

 Economy, General Interest  Comments Off on Recovery – When, How
Mar 252020

I remain convinced the coronavirus’s health and humanity issues will need to be under control before an economic recovery can even be fully contemplated. Quite frankly, I’m not certain we have reached that point yet.

Nonetheless, we do need to be making plans to increase the likelihood of a strong economic recover now! It appears Congress and the White House have agreed to a strong economic package that along with the Fed’s very aggressive actions should go a long way towards addressing the economic impact of COVID-19.

The stock market has a fairly well deserved reputation for being a predictor of the economic well-being of the economy. Although it was not very far in advance of the potential impact of COVID-19, this chart makes it very clear that it very quickly realized it was going to be very big and very bad!

At this point, all I can offer is hope that the market is comfortable with the situation and has found a bottom. Give me a couple of months, I’ll be able to give you a more confident answer.

The next question / concern is the shape of the recovery for the economy and the stock market. This chart from Danske Bank [I don’t know who that is] would suggest a very sharp decline in GDP followed by a very sharp increase and recovery. At this point, I would say I’m positive they’re right about the decline.

However, for the shape of the recovery, I’m not so sure. Some of the commentary I’ve seen suggests it is certainly possible to have a sharp recovery as personal consumption resumes. I’m pretty confident we will makeup some of the purchases that were delayed. I also believe we will soon go back to our favorite restaurant, but are we likely to order two meals to make up for the one we missed?

I certainly hope this very “V” shaped recovery is the probable outcome. But, the stock market will likely be our early predictor of what the data will ultimately tell us.

Time will tell the story. In the meantime, stay safe and stay well!

Action Bias

 Economy, General Interest  Comments Off on Action Bias
Mar 242020

I’m certain that I can’t add much new thought to the current situation.

We are all draw on recent past circumstances to guide our emotions and actions at this time. I generally get pretty skeptical of an analysis suggests that this time is different.

However, in many respects this time does offer some differences. This is a health driven – supply and demand economic issue. We have not faced this type of economic situation before.

The health concern is very real and very challenging. It is not however, unthinkable [just think about some of the Science Fiction movies from the 1950’s and 1960’s]. Some of the images of people in their PPE’s spraying who knows what.

In my investment experience for times like this, the best course has been to suggest that doing nothing is the best option.

Not surprisingly, I don’t know if this is actually the best or right advice at this time. Without doing the math, asynchronous returns make the ride very challenging. Not only hard on the stomach, but perhaps even more so on the emotions. The following is from Morningstar this morning.

 Advisor Insights Combating Action Bias We want to act, but should we?

Samantha Lamas
Mar 23, 2020

During times of market volatility, when investors feel that they are hemorrhaging money, a natural instinct is to stop the bleeding–to take decisive action instead of riding out the storm. Though taking action in the face of difficult times often works out well in everyday life, when it comes to investing, acting on that desire won’t necessarily help. To help ourselves and investors overcome this tendency, let’s better understand what’s happening.
A Bias for Action
Action bias is our tendency to take action for reasons that are generally valid, but not in the specific situation, especially when we focus on the benefits of action and ignore the costs. In our minds, even if acting and not acting result in the same outcome, that outcome feels so much worse when we didn’t take action.
The ongoing market volatility we’re experiencing will create a vicious cycle, where suffering losses because we didn’t make a change will be more emotionally taxing than experiencing losses after we made a change. In our minds, at least we tried to do something. Following are a few reasons many investors might be experiencing action bias right now.
Experience can’t always save us. A tendency toward action bias is something we appear to all suffer from, even those who are experts in their field. Even though investors may know they should stick to their financial plan, they may still feel pressured to act.
Seeing an impact now is more salient. When we take action in our current situation, we can immediately see the impact. If we ride out the storm, we won’t likely reap the benefits of this decision for months to come, which can make it even harder to resist action bias.
Investors are struggling under the weight of responsibility. Many of us may feel personally responsible to take action to protect our savings for the sake of our loved ones. Research finds that people who are in a role–either familial or professional–that makes them responsible for an outcome are more prone to exhibit action bias.”