LORD COPPER: Living with aimless markets

Dull markets are the bane of the trader’s life; no matter how much we wish for a quiet life when caught on the wrong side of a big move, the truth is that it is far more difficult to handle weeks of either no movement or no settled direction.

Dull markets are the bane of the trader’s life; no matter how much we wish for a quiet life when caught on the wrong side of a big move, the truth is that it is far more difficult to handle weeks of either no movement or no settled direction.

That’s what we have been faced with for quite some time now; there’s been no real consistency and seemingly the only change is driven by expectations of the appearance – or non-appearance - of tapering in the USA.

While Fed-watching is undoubtedly stimulating for some, it is, let’s be honest, somewhat monotonous.

Most of us are involved in the commodities market because we enjoy the unpredictability and the last period has been quite dull. So, I thought I’d have a look at how the market keeps going through dull, aimless times.

My first thought, of course, was that old, traditional LME standby – go out to lunch.

But then, I suspect that I am to an extent showing my age, because in this time of strict regulatory control and austerity, the opportunities are far fewer than they used to be.

The marketing trip?
For the brokers, there’s that great scheme – the marketing trip. Get out and spread the word among the customers that you’re the one to use. That’s good, except that the customers are also suffering like you and the most common response is that in current markets they have no real need to take on new brokers. Nice to meet you, and we’ll stay in touch, but…

So business is slow, new customers unlikely, and yet the management still want to see a positive P&L every day. The problem is exacerbated by the high percentage of business that goes directly to the market these days, as well; even at the best of times the traders don’t see the order flow in the way they used to, and yet the pressure is still on them to make money.

Lack of direction creates also problems for the hedge-fund managers. You’ve convinced your investors to part with their cash because you’ve shown them your glittering track record. Then the market stops playing the game, and suddenly the strategy you thought was a winner drifts away in the breeze.

But you’re charging a 2% management fee, and to sustain your lifestyle you really need to be pocketing some of that 20% profit share the investors agreed to.

Sell options?
So is it time to go for that old standby, and sell options? Rationally, it often sounds good in times of limited price activity; what could be better than being paid to watch the market not move?

Unfortunately, there are a couple of issues that make it more difficult than that.

First, the more you do it, the less you’re going to receive – trading against yourself, effectively.

Secondly, although the market seems like it’s not going to move much, there’s always the risk of that nasty spike; one of those often wipes out months of premium income.

Spare a thought for the poor old analysts, as well.

I was speaking a well-known technical analyst the other day, and he was bemoaning the fact that even if the market has no direction, he still has to put out a report each day for his customers. There are only so many ways you can say the market is trendless, so leave it alone for the moment until we can see something significant developing.

So it’s been a long year so far; lots of debating points – LME ownership change, warehousing issues, for example – but not so much of the lifeblood of a market – movement and change.

For the moment, it’s difficult to see too far beyond the tapering decision and what that means, but we shouldn’t ignore the fact that at the same time there is a degree of rationalisation going on.

After a decade or so where every financial institution in the world seemed to want to be a metal trader, that trend is reversing.

And what has that got to do with flat markets? Well, if they are the catalyst for a rethink by some less committed players, perhaps there is some benefit there after all.

Lord Copper
editorial@metalbulletin.com

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