Forget Bill Dudley. Mind The Flows That Matter

If you’re looking to explain intraday market swings, don’t read too much into the incessant barrage of soundbites from former officials, pundits and ostensible mavens.

“Equities were whipsawed by an ongoing market flow, not ‘headlines’ from Bill Dudley or Mohamed El-Erian,” Nomura’s Charlie McElligott remarked on Tuesday, referencing Monday’s price action. He cited “the ongoing unwind / roll-out of a very large SPX Call Spread” which “leaned on the tape all day, somewhere to the tune of nearly ~$6.2 billion in Delta which came in waves as parts of legs were sold off.”

For what it’s worth, Bloomberg’s Alyce Andres flagged the same flow. “Maneuvering or rolling down of Index call spread positions resulted in several billion sold in the underlying index,” she wrote, adding that “one large account appears to be behind the trade, and the rolls are yet to be completed.”

It says a lot about the media business when these dynamics are known, and yet stories touting Zoom interviews with folks like Dudley get top billing all day long.

“Dudley Says Fed Behind Curve” isn’t news. But it generates web traffic. Certainly more so than any esoteric recap of “maneuvering” around an options position.

Of course, if more mainstream coverage were devoted to the flows that matter, the associated dynamics wouldn’t be so esoteric anymore, as market participants would eventually learn why “that stuff” (so to speak) is more important than the idle musings of people who aren’t decision makers anymore, or at least not when it comes to making public policy.

McElligott went into considerable detail, but the upshot from the equities color in his Tuesday note was just that once again, the OpEx cycle could provide a window for movement, where that just means the distribution of outcomes in spot has the potential to be wider after compressing as realized vol reset following September’s pullback. Note the dearth of +/- 1% daily moves in the green, highlighted box (figure below).

It’s the same dynamic over and over. Vol-sellers and dip-buyers reengage at the first sign of “trouble” (conditioned as they are by a dozen years of muscle memory) and spot ends up pinned as hedging flows insulate the market from large moves. As the distribution compresses, realized vol moves lower, opening the door to mechanical re-allocation from the vol-control universe.

Until the next OpEx cycle, when the window opens again. In layperson terms, Andres wrote Monday that “options expirations have received attention lately because they’ve been be linked to bearish and volatile trading during the mid-month period.”

Well, it’s mid-month. And, as McElligott wrote Tuesday, we’re about to lose the “‘Vanna stabilization’ from the recent Volatility reset lower come Wednesday, and there will of course then be the substantial Index / ETF / singles options ‘Gamma unclench’ to follow, alongside historically massive $Delta to potentially de-risk as the options come off.”

Now that you’ve been properly reminded of what really matters, you can go back to watching Zoom calls with retired economists and ex-officials, almost all of whom would have you believe that if only they were in charge, they’d have found their inner Paul Volcker months ago.