It never gets old. Waking market participants up to what’s really going on behind the scenes, I mean.

Modern market structure is a helluva thing (which is to say a lot of fun) to observe if you know what you’re looking for. And totally befuddling (read: frustrating) if you don’t.

January 5, 2024 — so, payrolls day in the US — was the 0DTE show. You probably didn’t realize it. Don’t feel bad. The financial media didn’t either. In fact, scarcely anyone outside the options space has a good feel for the extent to which the proliferation of 0DTEs has turned every session “into its own ecosystem,” as Nomura’s Charlie McElligott is fond of putting it.

“Friday’s US equities trade was reminiscent of 2022’s ‘one-day event-risk’ environment,” McElligott said Monday, reminding market participants that in 2022, macro data overshoots (e.g., hot inflation or jobs prints) would trigger quick moves lower for stocks and knee-jerk moves higher for bond yields, followed in many cases by a reversal over the remainder of the session. Why? Why the reversal?

Well, as Charlie explained for the umpteenth time, it was “a function of SPX 0-1DTE option downside hedging being unwound to close/monetize, and then buying 0DTE upside calls to exploit the large delta cover on the rip back higher.”

That, he wrote, had a tendency to “leav[e] most market commentators outside of the options space scratching their heads as to ‘WhY sToCkS rAlLy?!'”

Friday, January 5, 2024, felt familiar in that context. Clients who were recently “chased into the market” put on some “same-day convex, short-dated hedges which are highly sensitive to changes in spot,” McElligott wrote.

That’s not speculation. There was a “massive tilt” to same-day downside which, importantly, was “paired with large net buy imbalances for calls in the 101-103% bucket” on the off chance any knee-jerk reaction to the data was quickly faded on the way to a counter-intuitive rally, particularly in light of the ISM services miss and accompanying dovish read on the survey’s employment gauge.

However, Charlie noted that the aggregate S&P 0DTE delta imbalance on the session was -$4.8 billion because the calls “weren’t able to convert in-the-money and offset the put flows.”

So, who benefited from — and this is my description, not Charlie’s — this charade? Well, market makers, naturally.

“Dealers in this scenario are effectively short the daily straddle / strangle to end-users long the tails in both 0DTE puts and calls on the day,” he wrote, describing a “nice PNL day” for MMs.

The annotation says it all. The conflicting data managed to “keep it between the lines.”

Charlie drove it home. “Both [the] selloff and rally were blunted to then finish unchanged by EOD, and on a day where the 0DTE flow as a share of overall SPX options trading was 99%ile on a one-year lookback and 100%ile for outright 0DTE SPX options volumes.”

These are your markets, folks.