THE ERRATIC ELEMENTS OF LIQUIDITY
How statistical effects gain momentum as trading turns towards automatisation
Investors, traders and market observers will remember it all too well: When the news about the upcoming pandemic broke in the first quarter of 2020, the global stock markets responded extremely negatively. The sell-off started in February, with major indices registering declines of more than 30 per cent over a period of just a few weeks. And while at that point, in the second half of March, most market players and commentators expected further losses, the markets overall did the opposite: Indices suddenly gained traction and started to go up – not only for a few days or weeks but pretty much for the rest of the year. Indeed, ultimately, they surpassed previous peaks and reached new all-time highs.
The fact that the markets recovered so quickly from the massive crash while the pandemic continued to rage around the world – eventually claiming more than two million lives (and counting), wrecking countless businesses and wiping out innumerable jobs – has been puzzling not only many experts in the financial industry. However, with the benefit of hindsight we are able to identify the reasons for both the unprecedented downturn as well as the unparalleled revival:
With regard to Covid-19, it’s fair to conclude that stock market investors did what they have done so often before: They looked well beyond a difficult situation and tried to anticipate the mid- or long-term positive development. However, real economy data deteriorated so severely during the pandemic that wilful ignorance or extreme optimism alone cannot justify the enormous gains at the stock markets. Obviously, the low-yielding environment as well as the willingness of governments or central banks to inject additional liquidity into the markets contributed to the significant inflows.
The pandemic is ongoing and the future remains unpredictable. Some strategists forecast further stock gains in 2021, including some setbacks along the way – a scenario in which the Covid-19 crash seems to have been little more than a dip in an ongoing bull market. Other experts think that, eventually, the stock markets will be brought down by the real economy – additionally impacted by rising interest rates – meaning that the “real crash” is still on the cards. And others again suggest that stock picking is the best solution to address the uncertainty.
Whatever happens, the volatility in the markets continues to offer a lot of opportunities when it comes to index trading. The high liquidity available on index securitised derivatives on Spectrum Markets, such as the DAX, FTSE 100, Nasdaq and Dow Jones, have constantly been among the most sought-after products on the platform, with retail investors taking long or short positions, using the venue’s cost-efficient and unique seamless 24 hours access, 5 days a week.
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