Drying up

Jittery tape, volumes down’ ran the headline of a broker’s recent market round-up. And so the listless days of summer descend, days where desks are sparse and terminals lie idle. Set against a market that has scorched the tape in a fizz, bang, pop of a rally, thin volumes and what promises to be an erratic earnings season is likely to curry up some dislocated pricing opportunities. And yet in the broader context of a market that is now in thrall to the policy makers, and a passive industry blind to the notion of mispriced securities and company fundamentals, the ’jittery tape, market down’ headline speaks of a dangerous fragility. As active managers grimly redeem, so the flows flood into the buffet of passive and passive like products, which exert an inexorable influence on the underlying securities. Dangerous too in the context of the regulatory driven changes to the floors of the trading houses, where dealing teams have thinned and phones gather dust, as what deal flow there is, gets stuffed down the electronic pipe and into the dark pools. The loss of specialist floor traders, hedge funds, and other market participants looking to squeeze dimes out the bid/ask spread have only exacerbated the near continuous decline in market depth since the Great Financial Crisis. Indeed the LA based investment advisory firm, Logica, whisper quietly that in 2013 it was possible to trade 9,000 S&P futures contracts off the top of the dealer’s pad. In March that fell to 9. Nine. As in one less than ten. Rephrasing that, in 2013 it took a $750m order to ‘move the market’, of late its more like $1m. Stunning. Through what is likely to be a summer of steamy headlines it is more than enough to distract holidaying money managers from their Jilly Cooper. Fragile markets, steamy headlines, likely leads to more dislocated prices: for those active managers left, it doesn’t get much better.