Institutional Investors Now Trading Like YOLO Crowd

The combination of manic intraday swings and myopia imposed by extreme ambiguity around the long run macro picture is making day-traders of institutional investors.

That was one notable takeaway from the latest by Nomura’s Charlie McElligott, who on Wednesday called US equities “a quagmire” of short gamma and “extreme” short delta (figures below).

Dealer hedging flows continue to serve as accelerants, exacerbating directional moves as dips are sold and rips bought. This is the opposite of the virtuous dynamic in which the same flows insulate stocks via what amounts to synthetic dip-buying and rally-selling.

“By and large, the ongoing concerns and short-dated downside hedging demand from clients keeps dealers net sellers of futures as they maintain their own hedges to stay neutral, but then too provides massive ‘covering fodder’ on rallies,” Charlie wrote.

This isn’t new. Hence McElligott’s “quagmire” characterization.

What is new, though, is the extent to which respectable market participants are increasingly prone to adopting a version of the Reddit/Robinhood crowd’s infamous, pop culture-inspired trading mantra.

“The literal ‘day-trading’ of options is fueling the manic intraday behavior [and] it’s not just retail YOLOing anymore,” McElligott wrote.

Lacking clarity on the long-term, and whipsawed by never-ending daily chop, institutional traders have “compress[ed] their time horizons now to intraday trading as well,” Charlie said. “You can’t just sit in positions while you’re constantly blowing through VaR risk limits daily.”

The figure (below) illustrates the point using Tuesday’s action in the tech ETF. The visual shows “aggressive” put-buying and the accompanying negative delta buildup.

This all feeds on itself, and it doesn’t help that market depth is generally impaired and prone to further deterioration when volatility rises.

“We are now increasingly seeing institutional investors playing the ‘retail’ game too, buying 0-1-2-3 DTE Puts on selloff days and selling out by the close or buying short-dated Calls on short-squeeze rally days [and] similarly monetizing same-day,” McElligott remarked.

As horizons compress, it’s a convexity whirlpool. Taking a view beyond the next few hours is all but impossible. Forget about next week or next month.