06.13.2016
By John D'Antona

TRADING THE WEEK: FOMC Outlook, ‘Quad Witch’ Ahead

The U.S. equity markets are going to be fairly quiet heading into the new week ahead of the eagerly anticipated Federal Open Market Committee meeting which will help provide guidance to the financial markets. Also, Friday traders must contend with so-called quadruple witching, which could generate some end of week volatility.

The FOMC will meet June 14 and 15. Market participants see little chance of a rate increase coming out of this meeting, but traders will closely peruse the Fed statement on Wednesday for clues as to what to expect in July and beyond.

“As has been the case since February, we’re all looking to see what the Fed will, or won’t do before committing to new positions or closing them out,” said a floor trader. “This week was fairly quiet as the market focused on the Presidential election and just some light position management, but next week can really see things pick up as the Fed finally meets and we have ‘quad witch’ to contend with.”

Quad witch, or quadruple witching, is when contracts for stock index futures, stock index options, stock equity options and single stock futures expire on the same day. This phenomenon happens only four times a year and given that four types of securities are expiring it could bring added volatility to the market as traders scramble to cover closing positions.

One trader explained that on this day the combined effects of derivative traders exercising in-the-money options and taking delivery on futures contracts, as well as traders practicing arbitrage are certain to make Friday a turbulent and heavily traded day.

“While quad witching is very very important in the options market, we can expect a lot more activity as stock futures and stock options, not to mention cash equities, will be trading,” the trader said. “So even if the Fed does nothing and the market holds steady, activity leading into Friday and on Friday itself will be busy.”

Last week saw modest trading activity leading as most traders had squared off positions ahead of the looming FOMC meet. Average daily trading volume as measured by Bats Global Markets was about 6.52 billion shares for the week ended June 10, off slightly from the 6.56 billion shares for the week ended June 3.

Of note also last week was the report from market consultancy Greenwich Associates that  announced the market share leaders in U.S. cash equities trading for the last year. Like in 2015, top tier bulge firms like J.P. Morgan, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley all placed in the top 5 in terms of market share. The strong showing comes amid yet another year of modest commission growth, a slowdown in institutional trading and regulatory change.

The top of the stock heap were J.P. Morgan, Goldman Sachs, Bank of America Merrill Lynch, and Morgan Stanley, all with trading shares between 7.8%–8.3%. Credit Suisse rounded out the top five with 7%.

This Week’s Major U.S. Economic Indicators of Interest:

Monday
Tuesday FOMC Meeting Begins
Redbook Retail Sales
Import Export Prices
Business Inventories
Wednesday FOMC Meeting Ends – Statement to Follow
Producer Price Index
Industrial Production
Thursday Weekly Jobless Claims
Consumer Price Index
Philadelphia Fed Business Survey
Friday Housing Starts

 

More Trading The Week:

Featured image by Rawpixel/Photodune

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