Forefront Communications

Bloomberg: The Bull Market Caught a Virus

Forefront Communications

Forefront Communications

Patrick Nichols, a partner at trading firm and client Old Mission, comments on the bear market and trading activity in Matt Levine’s latest Bloomberg article.

It’s weird to have a market crash with such a simple explanation. Why are we in a bear market? An infectious disease is killing people and disrupting all sorts of economic activity. That’s it; that’ll do it. If no one is traveling and trade is disrupted and businesses are closed and no one is leaving the house then, sure, corporate earnings will probably go down, and you should pay less for those earnings. On Monday I contrasted this simple story with the complex emergent financial phenomena that caused the 2008 crash, but 2008 is not the anomaly there. When you read about the 1929 or 1987 crashes, the stories involve some combination of speculative bubbles and leverage and slowing economic trends and unstable combinations of new financial technologies. In 20 years when you read the Wikipedia page for the crash of 2020 it’ll be like “everyone got a virus so the market crashed.”

Oh I mean it’ll probably go on! “Once all the companies stopped making money due to everyone staying home,” it might say, “they couldn’t pay their debts, which was bad for them and also for the banks who loaned them money, and also for the non-bank lending operations that had grown in the previous decade’s boom and never really been tested.” (“Will the coronavirus trigger a corporate debt crisis?,” asks the Financial Times.) Or whatever, I don’t know. There’ll be a section about some complex financial transaction that you’ve never heard of but that will have unwound in an unpleasant way. Maybe there’ll be a section on what happened to all the Redditors’ options bets when Robinhood crashed, that seems like the sort of thing you find in Wikipedia articles about market crashes. That Businessweek cover is gonna end up in the history books.

Naively you might think that trading would be smooth during the designated half-hour between 3:30 and the close, because it’s when everyone wants to trade and there’s a lot of liquidity; trading during the off hours would be more volatile because there are fewer people to trade with. But in fact: As investors have fled stocks and rushed into safe-haven assets like government bonds, sudden late-day moves in the stock market have been a staple, creating climactic swoons—and surges—right before the 4 p.m. closing bell.

The Dow has swung an average of about 300 points in the last 30 minutes of trading over the past 10 sessions—including Tuesday’s dramatic rally of roughly 400 points to end the day. That is roughly triple the average swing recorded between 12:30 p.m. and 1 p.m., when activity hovers near its lows of the day, for the same period. Patrick Nichols, a partner at trading firm Old Mission, said he often trades at the end of the session, when exchange-traded funds, pension funds and other investors are also active. There has been more activity there “than at any other time on planet Earth,” said Mr. Nichols. “Volatility has been exacerbated into the close.”

To read the full article, click here.

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