12 Days of Trading – Day 1 of 12: It takes two to tangoMark Montgomery
But did your partner tread all over your toes?
In the past we have commented about the dangers of trading at the Close on days when there are significant trading volumes expected.
Last week’s MSCI rebalance showed us new examples of the dangers. Taking the official close as a stick in the sand, we calculated the volume weighted average price (VWAP – excluding the Close) as a proxy for an “average price” that might have been achieved by trading in the continuous market.
We compared this to the official Closing price to identify large differences representing significant opportunities for profit or loss depending on whether you were on the “right’ or “wrong” side of the trade. For many stocks, these auctions resulted in significantly higher volumes of trading than the average total daily volume, not just the average closing turnover. That extra size traded magnifies the extent of the P&L.
We then went a stage further to look at the opening price and the VWAP the next day to see if the prices reverted back. If they did, this would indicate that the decision to trade at the Close was doubly painful for half the market – it takes two to tango, after all.
Let’s take a look at some examples:
Phoenix rising from the ashes
Hello (…not so) Fresh trading
Volvo – into reverse
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