Why a few stocks scored + 30% last week.
Dear All,
This post is about those companies of which the shares soared last weeks. Their shares gained over 30% while the rest was going down.
What kind of companies were these?
The companies I mean are so called market makers or market liquidity providers. They are a kind of tech company providing bid and ask prices who also trade for their own account.
Examples are Virtu Financial (USA) and Flow Traders (NL) but there are some players in each western country.
- Virtu is a leading financial firm that leverages cutting edge technology to deliver liquidity to the global markets and innovative, transparent trading solutions to our clients.
In brief these are the companies that make (ETF/share) trades possible even when there is not enough liquidity at any given moment. Their gain they make from the small difference between the bid and ask price they provide and from the volumes. Also they are allowed to give a larger spread (between bid and ask) if markets are in panic! So suddenly they make a lot more money because the volume goes up AND the margin goes up.
How can you follow if markets are in panic (soon) ?
The trick was to follow the VIX (market volatility index) or CBOE VIX. During 2017 the volatility index was extremely low (value<10) and shares of VIRTU and alike dropped in 2017 and were shorted a lot.
Suddenly one could see the VIX go up the first days of february and not a little bit but to unprecedented levels (value > 40). See bottom graph.
This person - and I have shared that in some comments to other posts here - immediately bought shares of Flow Traders expecting a good increase.
What happened next?
The companies also reported Q4 2017 numbers that same week and more important gave some 2018 guidance. The guidance of Flow Traders for instance was that in the first week of February they had made far and far more turnover then in the 2015 quarter with the Brexit. This meant they als made more than in the whole of 2017 and this triggered an enormeous run on the shares while parties that were short had to cover their losses asap by buying back the borrowed shares they sold before. This further increased the price of the stock.
The graphs
The only remaining question for me is now.....when to sell the part I still have. I sold 2/3 already.
regards
Goldrooster
These are some interesting companies that I haven't heard of before, it's nice to finally put a face to the "market makers"! My question is what advantages do you see from investing in these stocks instead of something like VXX if you are expecting an increase in volatility? Just limiting the downside?
I do not invest in many stocks at the same time and also try to get in and out quickly to limit exposure. But I am not a daytrader. If I think markets are too high like I thought recently I look for stocks that do well in negative markets. These companies can also be included to diversify an asset portfolio and limit risk as they are uncorrelated to other stocks. But I would not do that.
Amigo @goldrooster, excelente artículo, Te Felicito. Saludos cordiales.
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