With many traders asking the question, “how do I keep the doors open on my trading business?”, having traded through the last major disruption (GFC), I’m sharing my process of how I look to time taking on inventory and subsequently offering liquidity back to the market during demand-supply imbalances; which is keeping me playing in the current market.

Let’s do this via way of an example.

Last Friday morning (March 13), the Australian Grand Prix was cancelled due to efforts to contain the spread of COVID-19.

For the two days prior, even allowing for reduced liquidity due to the “roll”, frequently 6A was quoting a choice spread while volume at the bid and ask repeatedly dropped to single digits followed by fast minor reversals. At the cost of a draw Tuesday, I calculated how to play the new game so by Wednesday I was fading extremes using “stingy” limit entry orders followed by immediately placing limit exit orders to gain queue priority.  Thursday; and the same behaviour existed however, anticipating what had worked the day before to become more crowded (If I worked it out, then so will others), I worked bids and offers at varying levels around extremes of moves and acted now even faster to cover knowing my competition had increased.  

After hearing news of the cancelled grand prix, more size starts printing than what I’d observed the previous two days, even when accounting for the roll having ended. Why the greater size?

Traders pull away from the game during uncertainty or put another way when they lack sufficient points of data to price an instrument (based on their modelling etc.). The cancelling of the grand prix would be the precedent for all public events in Australia being cancelled with which comes an element of certainty and for various trading groups, this was sufficient to calculate what the price should be according to their modelling (either above or below current levels) and traders were quick to act to maximise the perceived price differential (if they made the correct bet).

Watching the tape, most of the size was on the sell-side. But here is where this got interesting….

I mentioned how Thursday the trade I was making over and over, the same trade that had been super effective Wednesday, was now becoming crowded and therefore less effective… Well, what are the chances that trade would work four days in a row? Answer… it won’t! The cat’s out of the bag. But, think of traders trying to adapt, playing back the tape of the day, looking for clues, looking for a way to participate that’s effective… What was old news to traders who picked this up three days ago (It started on Tuesday) was new for those who had only just picked it up.

The perfect storm…

With a skew to aggressive selling, I looked for the mother of all intra-day short-covering rallies and while I didn’t pick close to the bottom of any of the many hard and fast aggressive moves upwards; entries were obvious (to me and anyone else who understands the importance of before the outcome is known). The intentional reproducing of a similar variant of the previous two day’s tape action that had been affective to fade now acted as bait enticing additional short entries and was my cue to enter long. Exits were based around several factors including monitoring market pace, the tape and especially the footprint to gauge an end to demand-supply imbalance.

Each day, using accumulated observations of previous sessions and dissecting readily available market impacting events; like a detective, I combine numerous clues to create a hypothesis or several of where traders are likely to get caught desperately requiring liquidity. I then monitor the market in real-time to collate just enough evidence to enable me to position myself before the bulk of the event (and subsequent price movement) takes place.