Just how bad are trading conditions right now?
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Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I'm Ali Curi and every week along with my guests Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clara's blog. Let's get started. Hi Amir. Hi Chris. 

Amir Khwaja: Hi Ali. 

Chris Barnes: Hey Ali. How are you doing? 

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Chris, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss? 

All right, Ali, this week, I'm going to go full on ex trader. We are going to be talking about a headline that I wrote about a month ago now, which says, "Just how bad are trading conditions [right now]?"

This was written back when markets were going really, really crazy in August. And we hadn't really had a market event like that all year. And so as soon as I saw the volatility in markets, I started blogging about it. And I feel like reviewing it now, it's like one of those real, like, cringe blogs. You know, I think there is a real element that because of the transparency, because of the level of data, because of the level of content that's out there and produced time and time again, people are increasingly looking for stressors in markets, they're increasingly looking for volatility. They're looking for stuff to write about and I think there was a real sense back in August that particularly in the equity markets, valuations were stretched. Can the rally for equity markets really continue into the election? There was a lot of nervousness around. Couple that with the idea that August is always thinner trading conditions. And we really had a recipe for choppy markets. And yet, of course, the likes of us who are writing blogs and journalists are still there and are still producing content every day, right? And so people jumped on these moves and really kind of fueled the market moves, I feel. If you look back on it now, it was a healthy correction. It was a healthy event in markets. It produced a lot of interesting data. Also told us a lot about positioning in terms of the potential carry trade in yen, but it wasn't a signal or we think it wasn't a signal, at this point, that markets are really on the knife edge that it was kind of alluded to at that time.

So the blog, whilst I thought it might end up as a short series on what the hell is happening, what it really was is looking at how markets are functioning in a time when they are volatile. And we have to be very careful, I think in terms of talking about when markets are volatile versus when markets are stressed, there is a very, very big difference between markets being volatile and seeing big daily moves versus markets being under stressed conditions and trading as a crisis mode.

I think we saw crisis mode trading when we had the demise of SVB and the contagion of that default into other regional banks. I think the difference with the volatility we saw in August was that that was a lot of risk repositioning as opposed to a particular weakness in the markets. That had been identified that was having contagion across everything.

Yes, a lot of market, a lot of asset classes moved. There were big moves, but I think what we take away as market participants is that those were healthy moves. It was risk that was moving around. Markets were not seizing up. Yes, it was a stressful trading environment, but conditions were not stressed. And I think we've written about this on the blog time and time again, that because of the transparency we have in OTC markets now, we are able to assess this, we are able to assess whether trading conditions are volatile or whether trading conditions are stressed.

And the difference I would say is what is happening to volumes. Are you still able to trade meaningful volumes? Are you still able to move risk around? Now, large market moves don't happen unless you're able or trying to move large amounts of risk. But I would say what we saw in August was evidence that large amounts of risk can move and they can move continuously.

And so it was a very, very unusual time in that it's very rare to see record volumes traded in August markets. That is what we saw from my analysis of the SDR data. I think back in August, the 5th of August, it was the highest volume ever reported to SDRs for a single day. That is a huge thing to say, period.

We've had transparency since 2013, so that's a time period of 11 years. We've had a global pandemic since then, right? And volumes on the 5th of August were greater then what happened in March, but perhaps that's because they were stressful conditions and so people were still able to move risk around, whereas during the pandemic, it was a real, real stressed environment where you're not able to move that same amount of risk.

So it was great to see as a market observer. The other thing I just say is that we're probably dealing there with what we think of as a known unknown. We knew that there was a positioning bias for the carry trade. That was a known, what we didn't know is the size of it. And the volumes that were reported gave us some type of insight as to how much risk was out there.

I'll pause there, Amir, I'm dressed in full like trade and gear here. I'm wearing a red and white stripy jacket. I'm ready for all of those questions. As a trader, how would you have traded these markets, et cetera, et cetera. So, fire away. 

Amir Khwaja: Thanks Chris. Most of it, it's a very fetching jacket and I can see your hand signals now all over the place.

[Unintelligible] You know, interesting, some figures in there so nine of the top 10 days ever on SEF happened in 2024, which is surprising. It seems to be August is a "forgotten" given the S& P hit a new high yesterday. The Fed finally cut rates 50 basis point.

So I guess the market has been waiting, "Will they run there? How much?" So maybe that's why we have these 9-10 days of record volumes. I'm not sure, right? But it seems to me August has hardly been forgotten and we're now bullish, right? Are you bullish as a trader? 

Chris Barnes: I would say in December of last year, there was a lot of research written about how the Fed are trying to architect a soft landing.

And if the Fed are successful, the risk is that stocks just go to the moon, because then there is so much trust that central banks have the back of the market and can architect a soft landing coming out of inflationary period, which hasn't really ever been seen before. And there was that sense that if our knowledge and our data and our forecasting is strong enough now that a central bank can successfully support markets through a rocky period, then that is very, very bullish. We've seen a lot of nervousness for the last nine months over whether that is the case. And now of course the Fed have come out with an aggressive 50 basis point cuts that is kind of reigniting that narrative. So of course now the risk swings entirely the other way.

Whereby people have so much faith in the Fed that if they do disappoint markets, if inflation rears its ugly head again, et cetera, that is a potential for another wave of repositioning. But at the moment it feels very solid, right? It feels like we have a solid foundation. Feels like the central bank really has the back of the market, and that for once the market is not leading the Fed and the Fed is not leading the market, they feel in sync at the moment.

Amir Khwaja: And thanks, Chris. The soft lending, what about event risk of the US election coming up in November? 

Chris Barnes: That is a massive known known, and so I would argue that you look at the trading patterns and the volumes we've seen trade in these first nine months. I fully expect that the majority of accounts will not be running a significant risk over the election, particularly as it's a coin toss, particularly as everybody expects whatever result to be potentially contested.

Those are all big, big signs, right? That you shouldn't be looking to run a lot of risk. So that is the known, known and I think what I'd say and what I'd highlight Amir, is that me and you were at a talk last night on AI and one of the quotes that's really stuck out with me is that we shouldn't be scared of artificial intelligence we should be scared of natural stupidity. 

And that is so, so true for election risk, for financial markets. We're historically terrible at judging tail risk. And so everybody will be focused on election and known knowns. That means that everybody's attention is away from tail risk. And that is potentially a dangerous situation to be in.

Amir Khwaja: Yeah, thanks, Chris. Yeah, that's great. 

Chris Barnes: Cool. Ali, over to you. 

Ali Curi: Thank you, Chris. And please share with us again the title of your blog post. 

Chris Barnes: Title of the blog was "Just how bad are trading conditions [right now]?"

Ali Curi: Great, that works. I'm Amir Khwaja, Chris Barnes, thank you both for sharing your Quick Takes. Let's do it again next week.

Amir Khwaja: Thanks, Ali. 

Ali Curi: Thanks, Ali. See you next week. 

And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. 

Thank you for joining us.