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’Tis the Season to Be Careful: Trading in Holiday Markets

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December 7, 2016
Egg carton: Be careful trading the markets during the holidays.

It’s late December, and you’ve taken the last two weeks of the year off. The kids are visiting friends, your spouse is out doing some shopping, and you’re home all alone on a weekday. As an active retail trader, you decide to turn on your computer and take a look at the markets. With no work obligations, it seems like the perfect time to start making some trades … but is it?

The Lights Are On, But Is Anybody Home?

At this time of year, many of the large trading desks are lightly staffed, and many professional traders have taken time off from work for the holidays—just like you. And professional traders aren’t necessarily the only ones on vacation; many institutional customers avoid taking new positions as well, and may have lightened up on current positions prior to the holidays. Some traders require more perceived edge to open new positions or add to existing ones.

So who’s out there? Some trading desks assign their junior traders to “man the fort” around the holidays, and some of the smaller market makers—those who may be afraid of missing something—might stick around. In other words, there may be fewer participants in the liquidity pool around the holidays.

Thick Eggnog and Thin Markets

Because of the lack of market participants and order flow, market makers may be less inclined to tighten bid-ask spreads. With fewer senior traders at work, and with junior traders perhaps less inclined to put on risk, liquidity in the markets could decrease. So, for example, an at-the-money option market that was typically $0.10 wide could be $0.20 wide during the holidays. The width of the markets might increase, and the size available at those prices may decrease. The result: the cost to enter or adjust a position during the holidays may be higher.

Does this mean trading during the holidays should be avoided completely? Not necessarily. In fact, there may be opportunities if you’ve done your homework and have an idea about the levels at which you would enter and exit positions.

When Do the Holidays Start?

So when do markets become “holiday” financial markets? Typically, the markets will transition into holiday mode after the last significant financial event of the year. For 2016, this may be the much-anticipated Federal Open Market Committee (FOMC) meeting on December 13 and 14. Once the Fed’s decision on interest rates has been released, you may see periods of thin, choppy markets until the end of the year.

It’s Not Just About the Trades

Just because the markets are open doesn’t mean you need to trade. This time of year can be a great time to reflect on the past year and prepare for the upcoming one. You may wish to research new trade ideas, learn a new strategy, and review your trades from the past year. For example, a new administration will move into the White House in January, so it may make sense to do some research on how possible policy changes might affect the market in the coming year.

Finally, you might use the downtime to relax, spend some time with family and friends, and recharge your batteries. The time off could help to clear your mind and enable you to start off the new year on the right trading foot.

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