This is a guest post from Tusk Trader, an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
The markets have been sprinkled with some extra dashes of chaos this week with the melt down of MF Global. Many traders are being dramatically affected if they used MF to clear through. Those traders showed up to work Monday and could not trade. The CME and others are doing what they can to get people back up and running, but it will take time. Volumes at the CME are down 46% week over week in some sectors. That is a dramatic drop. MF Global traded in most international markets but the 46% drop at the CME alone stunned me. That is huge for this time of year. Thin trading is scary enough but thin trading during extreme volatility like we have these days can be scarier than Walmart on the Saturday before Christmas. You take your life in your hands when you choose to partake in adventures like that.
Be very careful in a thin volume environment. Being right on an idea in a thin market can bring some perks with price improvement, but being wrong is awful. When fewer opinions contribute to the process of coming to a reasonable market view on price, you can get whipped around like checked luggage on an Air Canada flight. Once you realize the trade is going bad, there is not always a lot you can do about. It’s awful because in a thin market, the more you try to bail, the worse it gets. The key to light volume trading is to make sure your own trading volume is in step with the market. It sounds simple but when the spread gets wider and you get a few good trades under your belt early, the volume you get involved with always seems to creep a little higher. You start to pick up a little here and little there, and then whammo, you have too much and it starts to go quickly against you. It’s like having the puck on your stick as you cross centre ice with your head down. You don’t even notice you have your head down until it’s too late.
Even if you are not trading directly the CME products, you will notice bigger than normal swings in stocks that follow the underlying commodities and futures traded at the CME (as well as stocks that usually have a large presence in the options market). Gold companies, oil companies, natural gas firms and the like, will all be a little jumpy this week while the MF Global issues work through the system and traders try to get back to work. Keep your trading volume light on light volume days.
Keep your head up.
Thanks Tusk. Make sure to follow Tusk Trader on twitter: @tusktrader