02/02/2021 — Four Bells and All’s Well
A little less than 48 hours ago when the after market trading hours began, the S&P index angrily screamed down 45 points before touching a local bottom of 3655. At the time, I felt the urge to buy a couple of futures as it seemed like an opportunity. The move had all the markings of an air pocket created by the thinner market depths that often accompany off-hour trading sessions.
I didn’t end up buying any contracts until they leveled off around 3700, which still went well, but I couldn’t help but feel a few pangs of regret. Two reasons made me think twice, one easier to accept than the other, but they both share a common thread through the GameStop mess.
My first concern centered around the speed and ease at which the futures discarded 45 points in a matter of minutes. I felt that a selloff had been lurking, but not to that degree. Sitting long several futures from buypoints much higher, it wondered how “future me” would feel if I buried myself deeper as the market sank further amid the short squeeze mini-revolution (you can read what I have to say about that here). I wanted to wait until the market settled — just a bit. Considering the market volatility and my combined futures and options position, that’s likely the approach I would take in the future as well.
The second reason for my hesitation I don’t like as much. If the market had continued to plummet, I might have started my Monday morning with a call from TD Ameritrade telling me that they were none too pleased with my current risk structure. In those situations, there’s a certain protocol that the risk managers have to follow, but depending on the severity of the risk, sometimes you can do a little work on your position with the assistance of a manager. By that I mean, you might not be allowed to make certain trades, usually opening new positions. However, with the blessing of a risk manager, you may be able to open new positions provided that the net effect of the trades results in lower overall risk. At times, TDA was willing to work with you to reduce risk as long as it made sense.
Sounds pretty reasonable, right? It is…or it was. Since the start of the pandemic, trading account holders and trading volumes have shot through the roof. According to an article recently published in The Economist, from 2019 to 2020, options volume alone increased by 50%! For brokerages such as TDA, this poses a double-headed problem. First, more accounts means more calls with traders to discuss their position limitations and risk issues. Second, there’s a pretty good chance that a lot of these new traders who constitute a sizable portion of this 50% growth have absolutely no idea what they are doing. And although only a few of them are getting bogus ideas from Reddit groups and the like, it’s not hard to see a connection between the two.
The result? TDA continually tightens, adding different risk tests that must be passed and they are less willing to work with traders to reduce risk. They have their own macro risk as a company, and who wants to deal with a bunch of punters who learned how to trade from a internet forum? Honestly, I can’t blame them, but the addition of this uneducated money has its downsides for those of us with a decent grasp on trading fundamentals.
On the flipside, I tend to believe that it’s this massive influx of cash that creates moves like we have seen these past two days. In just two days of trading the S&P rallied a whopping 170 points!
Four bells and all’s well…sort of.
