Normally, I write posts that are useful for a broad group of investors, but today I want to focus on a behavioural anomaly in markets that is probably only useful to professional market makers and traders.
Seems possible that this is the result of investors putting on pairs trades around earnings announcements?
i.e. imagine that traders check which companies are reporting overnight & go long/short on the companies according to their expectation for the announcement. Then they hang on to the position until the next report date for one of the two companies, at which point they consider the pair trade to be completed & unwind both legs, generating "excess" volume on the non-announcer.
That’s possible, but it is a weird pair trade. Why would I go long an industrial company and a health care company just because they tend to announce earnings at similar dates?
Because you have $100 free risk capital and just want to stick it in some trade? Choosing to invest this in earnings announcers in particular makes a lot of sense since volatility will be elevated, so you get a lot of bang for your buck.
Seems possible that this is the result of investors putting on pairs trades around earnings announcements?
i.e. imagine that traders check which companies are reporting overnight & go long/short on the companies according to their expectation for the announcement. Then they hang on to the position until the next report date for one of the two companies, at which point they consider the pair trade to be completed & unwind both legs, generating "excess" volume on the non-announcer.
That’s possible, but it is a weird pair trade. Why would I go long an industrial company and a health care company just because they tend to announce earnings at similar dates?
Because you have $100 free risk capital and just want to stick it in some trade? Choosing to invest this in earnings announcers in particular makes a lot of sense since volatility will be elevated, so you get a lot of bang for your buck.