Quiet Riot: Trading The Noise

OK, let’s take stock of a few things that we know:

1) It’s the last day of the month, with the concomitant fixing/rebalancing flows from non-directional players

2) It’s the week after the UK bank holiday and the Friday before Labor Day

3) There are rumblings of exotics flows going through the European fixed income market of the kind that provided so much joy in June

4) Sensationalist stories are circulating that the Chekist Republic will cease oil shipments to Western Europe; in any event, the saga in Georgia rumbles on, with Turkey somehow getting sucked into the fray

Suffice to say that market liquidity is “subnormal” and that the noise-to-signal ratio is nearly infinite. Given the low levels of staffing and interest today, price action is perhaps best described as a “quiet riot”.

These sorts of markets are not Macro Man’s forte, and he’s reduced risk to the extent that he’s now carrying almost as much VAR risk on his left hand (via his wedding ring) than he is in his book. A slight exaggeration, perhaps…but not much.

How bad is it? Consider one of Macro Man’s recent trades. On August 21, with USD/JPY at 108.32 and seemingly headed to zero (having been nearly 2 yen higher the previous day), Macro Man took a tactical bet that it might mean-revert, and bought an August 28 expiry 109.50 $ call for relative peanuts. Less than 24 hours, spot was through his strike.

Thus ensued a week’s worth of furious gamma trading, with Macro Man selling USD/JPY spot above his 109.50 strike and buying it back below. It’s a measure of how noisy the market has been that he managed to execute 17 (!) different gamma trades in the span of five days. Part of this total is down to his style of doing multiple small clips rather than one large one. but still; spot crossed through strike every single day after he bought the option.

Now, this particular trade was a successful one; Macro Man made three and a half times as much scalping as he spent on the option. But still; it’s noise trading to the very edge of reason, and the return for all the attention and trading was, at the end of the day, pretty modest.

And to be honest, Macro Man doesn’t enjoy it very much. Far better to wait for the dust settle, the smoke to clear, and for macro themes to re-assert themselves.

“Come on feel the noize”
-Quiet Riot, covering Slade

Posted in Categories: Contributor, Economy, Eurozone, External Research, Forex, Japan, UK, USA.

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