Papale on Slow Markets

Article in Bloomberg last week about the drop in trading volume in the equities markets recently.  The article hinted that if volume does not pick up traders might start getting laid off.  It was interesting to note that the psychology of the business is to pay high and layoff rather than to have a more moderate pay scale and be able to withstand slower times longer.  It suggests traders at these firms fill their time writing blogs and marketing until volume picks up or they get the pink slip.

Staying with the topic of slow markets, this has been something traders must deal with regularly.  Depending on the style of trading, the effects of a slow market will differ.  While it may seem  obvious, slow markets are usually characterized by listless or drifting markets, lack of significant news and seasonality (August tends to be thought of as slow since many participants go on vacation).  The result of these factors is lack of orders and volume.

For the broker or market maker these slow markets mean loss of commissions or trading edge so the effect is direct.  The result for the rest of us who are typically market takers is wider markets and greater slippage.  When volume trails off perceived execution risk rises as there is less opportunity to lay off risk for the liquidity provider.  Hence, when markets dry up, bid ask spreads tend to widen.

While this is not always apparent in posted markets, it becomes more evident for the person trying to put a larger order in – it is difficult to get filled at one price.  For all of us, we need to exercise patience and discipline during these times.  I have seen many traders get in trouble because they got bored and traded outside their trade parameters.  Stick to the trade plan.  We talk about how it helps us execute when markets go crazy.  But it also can keep us from reaching on a trade when boredom kicks in.

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