A Tumultuous Week for Quants?

Quant traders, one key to success is understanding market structure – the mathematical and regulatory underpinnings of the stock market.

And speaking of which, the second time is a charm. Jamie Selway has been named the new head of the SEC’s division of Trading and Markets overseeing US equity trading. He was first rumored for the position in 2017 before Brett Redfearn from JP Morgan took the role. I got to know Brett quite well and hosted him at the investor-relations profession’s annual conference in 2019, the NIRI Annual Conference.

Like Mr. Redfearn, Mr. Selway is a market-structure guy with a Masters Degree in math from that quant kingdom, the University of Chicago. Previously, he headed electronic brokerage for industry agency-brokerage pioneer ITG (a big “dark pool” for institutional flows), which Virtu bought in 2019. I don’t know him well but he’s been a force in market-structure circles a long time.

Now, why does this matter, traders and investors? You want folks in key regulatory roles who understand the plumbing, the mechanics, of the equity market. Check.

Speaking of market structure, this is a momentous week. War – I don’t know what else you’d call it – between Israel and Iran continues. What’s fascinating is how things that would affect HUMANS have little bearing on machines. Friday’s pullback was price-driven too, rather than war-driven. Commodity prices convulsed, especially oil. Machines read prices, not ideas or emotions or rumors. Machines react to prices. Keep that in mind. And wow, what a week of inputs into prices we’ve got.

Let’s set the stage:

An algorithm we call “Demand” that normalizes buying and selling in US equities to a ten-point scale is at 5.8 and still rising despite Friday’s declines. But 6.0 is a top. And Demand that stalls at 6.0 often precedes falls. That could happen tomorrow or Wednesday. (For more, visit EDGE.)

And we measure Supply as well, using the data set for Reg SHO Rule 201, called Short Volume. The five-day average is 54.4%, meaning the market is meaningfully more short than long – a byproduct of Exchange Traded Funds. The “arbitrage mechanism” keeping them aligned with stocks leads to borrowing by market-makers. It doesn’t mean stocks are about to plunge. It DOES mean the market is over-supplied and a drop in Demand could suddenly deflate prices. And get this, the daily read hit 55.3% Friday, the all-time record.

Now here’s what’s happening this week – a vital quantitative input we call “Context” – the cadence and calendar of tradeable events:

• The Federal Reserve meets Tue-Wed to weigh data and rate decisions and chair Jay Powell speaks Jun 18.
• VIX and index options reset Jun 18.
• The G7 leaders are meeting in Canada where tariffs and trade will dominate the docket.
• Thursday US markets are closed for the Juneteenth holiday.
• Friday is a quad-witch in options, and there are quarterly S&P index-rebalances.
• Oil has just posted one of the fastest moves ever — $60-$72 in two weeks.

By the way: The market holiday means EDGE will NOT have the usual weekly live Discussion this Thursday. Please join the next one.

Which brings us to the conclusion: If we ever had a reason for things to move unexpectedly, this is the week. That can also mean nothing happens. Be prepared, however. Don’t be caught out. To stay abreast of the market’s cadence, sign up for our free Daily Market Desk note.

And we’ll see you a week from Thursday here!