Get ready for gap risk as markets overreact to every sliver of election news
It’s one thing when a notoriously volatile stock of an unprofitable company swings wildly for next to no reason.
It’s quite another when the US Treasury market does the same thing.
10-year Treasury yields, which were up about eight basis points on the heels of encouraging survey data on the US services sector this morning, gave all that up — and then some — this afternoon.
Volatility in purportedly deep and liquid markets is simply a signal that traders are very jittery and trigger-happy.
If this kind of action is happening during regular trading hours, we should be on heightened alert for “gap risk” — loosely, abrupt changes in the value of a security — during the futures session that starts this evening as markets (over)react to incoming data that sheds some light on the results of the election.
“But wait, how can high volumes and low liquidity possibly coincide?” you might ask. Well, market makers can shy away from doing their essential duty of matching buyers and sellers when traffic is intense and one-way, thinking that all this volume “knows” something that their algos don’t.
Not to foment fear here, but comments I’ve received from portfolio managers and traders in the past half-hour include “my blood pressure is rising thinking about early Asia” and “I think people are not attuned to how bad certain markets could get.”
The silver lining on gap risk is that the volatility can create attractive entry points for traders able to get fills. The glass-half-empty part is that, obviously, positions can move meaningfully against you quite quickly.
