Making a trade and checking it twice: Trading mistakes to avoid over the holidays

Trading over the holidays?

You’ll want to check this list - errr, article - twice. Because when it comes to trading, end-of-year holidays can be a gift or a burden, depending on the expertise level of your trading partner.

Each country has specific market-closure holidays throughout the calendar year, and within each closure, there can be additional nuances. Take, for example, Veterans Day in the U.S., which was recently observed on Wednesday, 11 November. While this was a considered a national holiday in America, equity markets remained open. However, because it was classified as a federal banking holiday, U.S. fixed income markets and settlement systems were closed, so settlement cycles and cash availability expectations had to be adjusted, along with market liquidity limitations

Ultimately, in each country - and, in some cases, at the regional level - multiple considerations need to be taken into account when trading near the end of the year. This is because, starting in late November and ending after New Year’s Day, there is a confluence of holidays that historically have had a significant impact on liquidity, impact, spreads and opportunity costs.

When properly managed, all these factors - across all asset classes - can yield positive outcomes. On the flip side, when these factors are managed poorly, or when the unique factors pertaining to market closures are overlooked, the probability of a suboptimal result increases. Below, we’ll examine the global liquidity environment across asset classes during this end-of-the-year timeframe. These observations are based on our decades of experience as a trading solutions provider and are intended to serve as approximate figures. Note that because the U.S. comprises roughly 50% of the overall global market, U.S.-specific holidays can have especially significant impacts.

Equities

U.S. Thanksgiving

U.S. volumes are typically 80% of normal on the day prior to Thanksgiving and 45% the day after, which is a half-day session.
Europe volumes are 90-95% of normal the day prior to Thanksgiving, 60-70% on Thanksgiving and 70% the day after.
Asia volumes tend to be 85% of normal over this three-day period.
One thing to consider is that there can be a catch-up period starting on the Monday after Thanksgiving, with outsized volumes.
Specific to this year, the MSCI semi-annual rebalance will take place on Monday, 30 November. We estimate that this will result in a 17% increase in volumes.

Christmas and New Year's

Global equity markets tend to trade at 45-70% of normal volumes starting 23 December. They typically return to normal volume two to five days after New Year’s Day (1 January).
Equity observations
Lower volume levels historically tend to have larger impacts when moving in/out of positions, leading to more significant cost implications.
Lower volumes tend to widen spreads, which also negatively affects implicit costs.
Opportunity costs may rise, as the timeline of implementation may be longer due to the lack of trading volumes.

Equity observations

Lower volume levels historically tend to have larger impacts when moving in/out of positions, leading to more significant cost implications.
Lower volumes tend to widen spreads, which also negatively affects implicit costs.
Opportunity costs may rise, as the timeline of implementation may be longer due to the lack of trading volumes.

Fixed income

Christmas and New Year's

U.S. fixed income volumes are typically down 20% in the month of December.
The decline in European fixed-income volumes is even more pronounced, with a drop between 20-40%.
Volume in Asian markets is typically down between 40-50% between Christmas and New Year’s.

Fixed income observations

Longer time horizon to complete trading.
Higher possibility of not being able to execute trades at expected level.
Spreads widen, but patience is rewarded.
Less inventory from dealers, which leads to less offerings in the marketplace.

Foreign exchange

Christmas and New Year’s

Typical volumes start to recede in mid-December, and continue at lower levels through year-end.
Historically, Christmas Eve and Boxing Day are the quietest days of the year, with volumes roughly 20% of normal.
The week between Christmas and New Year’s is typically 50-70% of normal volumes.

Foreign exchange observations

Lower volume and less liquidity typically leads to widening spreads.
While the top of the book may remain tight, the depth of market will be less.
Trading in this class over the holidays could mean dealing with back-up coverage.

Derivatives

Christmas and New Year's

U.S. future volumes for the month of December are typically down 20-30%.
Asian future volume usually decline about 20%.
European future volume are typically lower by roughly 0-10%.

Derivatives observations

Lower December volumes are exacerbated around the period between Christmas and New Year's in particular.

Overall impact of trading over the holidays

Ultimately, lower liquidity and lower trading volumes over the holidays typically lead to wider spreads. This can result in larger price swings and an overall increase in market volatility. Depending on the size of the trading event, the market impact may be greater than normal. This makes tight coordination between parties all the more imperative during this period. Keep in mind that holiday-shortened schedules are common across the board.

The bottom line

Trading well in global markets is difficult, even in normal times. Over the holidays, the challenges can be even more daunting due to less liquidity and wider spreads. When considering a trade during this timeframe, we think it’s best to determine if the proposed event can alternatively be completed in the first half of December or during the second week of January. Otherwise, multi-asset class trading events may experience a potential higher cost of implementation, considering the overall liquidity ecosystem.

However, we also recognise that portfolio needs don’t always align with the rigidities of a calendar. If a trade during the second half of December is necessary, we believe partnering with a seasoned trading team can provide the necessary expertise, sophistication, coordination and overall management to help achieve positive outcomes.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.