As The World Turns

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As The World Turns
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Chad Steinglass, Head of Trading for CrossTower shares, some thoughts on recent market activity. In his piece below, he covers global trading trends, particularly in China as well as Tesla, ARK innovation stocks, the US markets and BTC.

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Some years ago, I transitioned from trading equity derivatives to trading derivatives on precious metals. While the lion’s share of the volume in Gold and Silver options trades during US market hours, it was my first experience with an asset that traded nearly 24 hours a day. Metals futures closed everyday for 45 minutes, but for the other 23 hours and 15 minutes, business was open. Except of course on Saturday and Sunday, and those weekend days were indeed as precious as the metals I was trading. When I moved from Chicago to New York after a year on the precious metals desk, I happily switched back to equity and ETF options trading and the predictable schedule of US market hours.

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Trading Crypto In A Never Sleeping Market

When I started to get involved with crypto trading, I remembered the lessons I learned as a metals trader, and approached with caution. Here was an exciting new asset class, but not only does it not take off for 45 minutes of downtime in the afternoons, it doesn’t even take off weekends! I needed a good strategy to be able to trade this never sleeping market without losing too much sleep over it. Thankfully, unlike my metals trading, I wasn’t running a market making desk, so the only thing keeping me up at night was worrying about missed opportunities rather than quoting obligations.

For many crypto traders who mostly buy and HODL, there is no need to stay up all night watching markets. It is easy to place a couple small limit orders to buy well below market prices and sell well above to help catch at least a little part of overnight swings. And for the most part that is all a casual trader needs. However, over the last several weeks, a trading pattern across the globe seems to have been established, one that it might be worth paying attention to even for the casual crypto trader. It might change as more traders notice it and try to trade ahead of it, or perhaps it will vanish into thin air tomorrow, but in the meantime it's worth a look.

Ever since coming back from Lunar New Years in mid-February, Chinese equity markets have been relatively weak compared to their western counterparts. During some of this time, global markets became mired in turmoil as fears of long-term interest rates and inflation sent growth technology company valuations into a tailspin. But while US tech company valuations have rebounded well off of the lows, if not coming quite back to highs, China is lagging well behind. On days when US markets rally, Chinese markets have consistently been opening higher, to be in line with the US moves, and then immediately selling off in a straight line. This aversion to risk in Chinese markets has also been seen in BTC, with selloffs coming right around the time of Asian equity markets opening.

Tesla And Other ARK Innovation Stocks Coming Back Down To Earth

Conversely, other than the tech route that brought the highflyers of TSLA and the other ARK innovation stocks down to earth, US markets have shown resiliency. And it is clear that a significant portion of the support in BTC markets is coming from US institutions as well. As much weakness as BTC has been showing around the time that China starts trading, it has been showing an equal amount of strength in mornings when the US traders wake up and sit down at their desks.

It is not terribly uncommon to see this type of time zone cyclicality, and it is often the natural expression of different attitudes towards risk in different regions of the world. In general, Europe tends to be more risk averse and the US tends to be more risk seeking, and Asia usually just follows along unless there is some specific news of their own to lead the way. In the current regime, it seems as though Asia is liquidating assets, both crypto and equities, the US is buying everything, and Europe is the one stuck in the middle. It is rare for this pattern to persist for very long, as traders who notice it will simply start to accumulate inventory during Asian trading hours on the weak part of the cycle and then sell that inventory out during US hours in the strong part of the cycle. This action should work towards dampening the effect.

What I’ve been noticing recently, however, is not so much a dampening of the effect, but it is just moving forward in time each day ever so slightly, much like marching tides completing a full tidal cycle in 23.5 hours. The dips, which a week ago were in tandem with Asian equity markets opening, seem to be coming an hour or 90 minutes before that bell, and the rebound is occurring sometime during the European morning hours, after Europe decides whether it wants to follow Asia or get ahead of the US.

The Least Amount Of Liquidity Worldwide

The timing of the pre-Asian selloff has one attribute that I find noteworthy: It is within the small window where I expect the least amount of liquidity worldwide. The no mans land after the US traders have wrapped up and signed off for the day, but before Asian traders wake up and log in to start the next trading day. This is the time where the least amount of volume can have the largest market impact. The same is true over the weekends, especially in the morning hours on Sunday. And as such, we have been seeing swings over weekends as well, often only to see those swings revert before markets open on Monday, much like we saw this past weekend after gapping to new all-time highs on Saturday.

So, what is a humble US based trader to do? The first step is to recognize that BTC liquidity is not constant. Even though most market making algorithms run 24/7/365, they rely on actual diverse order flow to balance to maintain liquidity. When there is not a lot of order flow from many small buyers and sellers, and then one somewhat large order hits the market, market makers will move prices drastically to avoid taking on too much directional risk. These moves during these illiquid times might be significantly larger in amplitude than the volume that caused them would warrant during regular trading hours.

As a trader, I wouldn’t try to take advantage of this too much; it is difficult to predict when a spike or drop might occur, and hard to know for sure if its an overreaction or not. But with a little discipline, one can at least make sure that these dynamics are working for them rather than against them. First, if you want to accumulate BTC anyway, you can place small orders scaled well below the current market price before you go to bed (only for the amount of BTC you want to buy anyway, of course). Similarly, you can place small sell orders above current market prices if you would be happy reducing your stash if prices pop. This is really a best practice for all assets during periods of low liquidity, but is especially applicable to crypto due to the 24/7 nature of digital asset markets. From a psychology perspective, try not to get too anchored to a price that we reach over a weekend. While it was fun to see that 6 in front of all those zeros while checking on BTC prices this past weekend, don’t get too down on the fact that come Monday prices were back in line with levels from the previous week.

And lastly, for the adventurous traders who trade in highly levered swap and other derivative contracts on offshore exchanges, the biggest pitfall of all to avoid is to make sure you do not carry significant leverage overnight. If you’re not careful and are carrying too much risk for the collateral you are posting with the exchange, one of these little spikes or dips that really means nothing by the time morning comes along could wipe out your entire position.

Happy trading!


About Chad Steinglass

Chad has over 15 years of experience trading equity, index, and credit derivatives. He is an expert in market dynamics, market microstructure and automated market making and trading systems. He is available to discuss the insights below. Prior to joining CrossTower, Chad was a Portfolio Manager for Capital Structure Arbitrage at Jefferies. Previously, Chad was an options market maker at Susquehanna and Morgan Stanley and the head trader for a division of Guggenheim.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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