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About The December 20 0DTE Mini-‘Crash’
Did you hear? The stock rally died mid-week.
If it has a Lazarus moment, don't be too surprised. 'Tis the season for miracles, after all.
Plainly, US equities didn't sell off on December 20 for fundamental reasons. Reading the real-time commentary during Wednesday's "crash" (note the scare quotes) was nails on a chalkboard.
For one thing, it wasn't a "crash." Whenever the range of daily outcomes compresses such that people forget what a real selloff looks like, a 1% move to the downside, when
I thought it would melt up or meltdown at the end of this expiry. The last sentence of the article was disconcerting.
“The potential forced unwinding of positions would have to take place in a market environment where market liquidity is still impaired from the pandemic.“
Good Lord, are we still blaming the pandemic for every exogenous shock that comes along?
They blamed the repo loan crisis ,that started in the fall of 2019, on the pandemic too.
Smoke & mirrors…..
He’s referring to actual metrics there. You realize that, right? That is: Specific measures of market depth which haven’t recovered since February 2018 and were further impaired in March of 2020. He wasn’t making a nebulous claim. You can measure market depth. What he’s saying isn’t a debate. There’s nothing to disagree with.
Yeah, I know he’s talking about market metrics, they changed before the pandemic, actually changed waaay before the pandemic, so not sure why he commented that they have changed “from the pandemic”,
I know he’s not inferring it was caused from the pandemic, but even if he said, “since the pandemic” doesn’t make sense because none of this has anything to do with the pandemic.
It makes perfect sense. They are still impaired from the pandemic. I’m not confident that you know what metrics he’s talking about, frankly. I think, rather, that you were keen to criticize and you assumed that no one would reply to you. Alas. So, what measure are you using? What are your metrics? And what’s your reference point for “waaay?”
I will 1up this, this is absolutely a dynamic we see; ultra short term options are essentially the lowest cost way of regulatory risk mitigation, particularly around month and quarter ends. The new Basel3 rules already implemented outside the US create even more incentive for this as regulators will use single day snapshots for capital (as opposed to longer term average under say a VaR framework). I suspect volume will only increase around month or quarter ends.
To be fair, there are regulatory-/risk-management arb opportunities in 0DTEs, and I suppose you could argue they do serve a purpose for “hedging short-term risk,” as Bloomberg euphemistically put it, in the linked article mentioned above.
Hey ANON, an interesting idea. Following in the revered tradition of all manners of dividend washing and end of quarter cash swaps.
But, serious question: what is the magnitude of equity holdings by institutions subject to Basel3 rules? I’m out of touch, but I thought that most banks had dramatically pared down stock and bond inventories.
Are the jockeys on the equity desks at banks getting aggressive again? Aggressive enough that their holdings would materially impact their Basel3 ratios?
Thanks.
Seems to me that Skynet lives…and feeds on the markets .