A Quant Trade Hits Records Riding Falling S&P Futures Liquidity

(Bloomberg) -- A stock strategy that surfs the waves of buying and selling over the trading day is having its moment in the sun.

A Deutsche Bank AG intraday trend-following index just posted a record one-week gain of nearly 10%. It’s one of the few systematic styles to win big in this environment of declining liquidity and spiking volatility.

The recent performance of the rules-based strategy, which tends to do well at times of choppy trading, is besting even the depths of despair notched in the euro meltdown of 2011 and the global financial crisis in 2008.

Thank index funds trading en masse or late-day speculation on U.S. fiscal support or fresh coronavirus-related containment measures. Either way, big moves in the run-up to the market’s closing bell are helping this breed of momentum trading.

“As markets are trying to price in the newsflow and as people are trying to unwind their equity positions, finding liquidity is a challenge,” said Sandrine Ungari, head of cross-asset quantitative research at Societe Generale SA, which offers such a trend-following product to institutional clients. “With less investors committing to buying stocks, prices drop and that creates trends.”

In a sentiment-driven market, a red session in the morning is likely to induce more selling as the day grinds on. As the closing bell nears, option desks have to hedge their positions by selling more, while exchange-traded funds need to track closing prices. With futures liquidity worsening, the move amplifies, and it becomes more beneficial to be trading against the market at that time, according to Ungari.

Even as transaction volume in S&P 500 futures jumps, the median size that can be traded at the prevailing prices has plunged, a sign of deteriorating liquidity, SocGen data show.

Investment banks have seen even greater opportunity in the strategy thanks to the boom in passive and index investing. Some 23% of stock trading volume happens in the last half hour, New York Stock Exchange data showed as of mid-2019, compared with 18% in 2010.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Sid Verma

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