Read on Twitter
There& #39;s a paper here that has spawned hundreds of dubious strategies called & #39;intraday momentum& #39;.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2440866
It">https://papers.ssrn.com/sol3/pape... says on SPX the first half hour of trading predicts the last half hour, stronger on volatile days. The stats look convincing
1/n
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2440866
It">https://papers.ssrn.com/sol3/pape... says on SPX the first half hour of trading predicts the last half hour, stronger on volatile days. The stats look convincing
1/n
This is entirely possible due to variance swap delta hedging, which i wrote about once in another life.
Var swap owners (banks) will sell down days at the close and buy up days to hedge, will produce the effect seen.
2/n
Var swap owners (banks) will sell down days at the close and buy up days to hedge, will produce the effect seen.
2/n
I dont think anyone has ever made that connection before but to me its clear.
So here& #39;s the kicker. Now the market is getting full of these & #39;QIS& #39; strategies that are eating into structured products space. The market is changing.
3/n
So here& #39;s the kicker. Now the market is getting full of these & #39;QIS& #39; strategies that are eating into structured products space. The market is changing.
3/n
What they do is follow the paper above - wait for some intraday signal, trade, and close the position on the close. So if market is down early, sell, and buyback at 4pm.
4/n
4/n
In the days of variance swap dominance this could work. On a big down day you& #39;d be selling ahead of the var swap hedgers and buying back just as they sold vast quantities of futures in turn.
5/n
5/n
Now, however, we can have big down days early and there& #39;s no follow through. We& #39;ve seen this repeatedly since April - the move on the close is much more muted than in Feb/March. This is because the short variance books all blew up and they haven& #39;t come back (bye Malachite, 
https://abs.twimg.com/emoji/v2/... draggable="false" alt="đź’”" title="Gebrochenes Herz" aria-label="Emoji: Gebrochenes Herz">).
However the dynamics are still there in the history and influencing the backtest - so every mid level structurer on the street is salivating at the idea of intraday trading like the trader they always wanted to be - but the market has changed.
7/n
7/n
On a collapse, these products BUY around 4pm , so you get a bottoming process. Conversely they buy rallies intraday and sell at 4PM. Opposite of the var swap hedging, and binary - not quadratic in spot move so less chaotic.
8/n
8/n
But if the spot move is large enough to hit everyone& #39;s trigger, there may be decent volume here. And you& #39;ll continue to see stability and mean reversion around the close, rather than the panic last seen before the March expiry 2020.
Worth monitoring.
9/9
Worth monitoring.
9/9
"JP Morgan has seen considerable interest from clients looking to get exposure to a bespoke version of its intraday momentum strategy"...
"Intraday momentum strategies have been a big focus of my team"
https://www.jpmorgan.com/solutions/cib/markets/investable-indices/risk-premia-defense
June">https://www.jpmorgan.com/solutions... 2018
"Intraday momentum strategies have been a big focus of my team"
https://www.jpmorgan.com/solutions/cib/markets/investable-indices/risk-premia-defense
June">https://www.jpmorgan.com/solutions... 2018
