Episode 2: Wall Street vs Main Street

Hi I’m Oliver and welcome to Data On The Data. There will be no surprise that today, we're covering a topic that has dominated market headlines recently.

Over the last couple of weeks, we’ve seen some incredible price action in a variety of single stocks. GameStop has grabbed the headlines with a price surge from 50 dollars to nearly 500 dollars and then back down below 100 in the space of 9 trading days. Its volatility has approached an incredible 1,000% – to put that in perspective, Bitcoin’s volatility is under 100, and we all know how volatile Bitcoin has been recently. The mass media has jumped on the Wall Street versus Main Street narrative, but this event wasn’t isolated to a corner of the US equity market. When we look at the data usage, we can see that this event had an impact across all assets. The squeeze in GameStop had been building momentum for some time, but in the week beginning the 24th of January, the stock really began to take off, QUINTUPLING in a matter of days. The shock waves went far beyond a handful of hedge funds that were reported to be in trouble. Many risk assets began to tumble and on the 27th of January, the S&P volatility index spiked higher as broad-based equity markets sold off. Copper and many of the other reflation assets fell, whilst the dollar rallied against a large number of currencies. What had begun in a corner of the US equity markets was now a global event.

The surge in volatility in a few US stocks has triggered massive margin calls across a number of exchanges, forcing hedge funds to reduce risk by selling winners and posting additional capital with their prime brokers. This was also a wake-up call for many other market participants. There was a huge increase in data usage across our FX and rates platforms. Whilst we often expect to see month end hedging activity increase, this was a significant step change in Foreign Exchange cross rates and forward swaps, where the volumes of data usage approached the levels associated with the busy year end period prior to the December holidays.

Some of the largest increases in data usage were from corporate treasuries where volumes jumped 385% in FX cross rates and 625% in FX forward swaps. The squeeze in GameStop became a timely reminder that global markets are incredibly interconnected and that events in one asset class can ripple out across the world, impacting businesses as well as investors. Risk managers will again have taken note that short lived events which appear to have little connection to their core businesses or investments are in fact linked by the volatility regimes that underpin financial markets.

Although the VIX surged, it has now started to drift back to previous levels. The volatility in other assets classes such as foreign exchange is still close to the bottom end of the one-year range. The pick-up in data usage across our foreign exchange platforms suggest that currency markets are experiencing a burst of life that might now increase the demand for volatility products in this asset class. If equities can impact commodities, rates and currencies, then global investors will be looking for hedging opportunities wherever volatility is at attractive levels. The media maybe watching the GameStop headlines, but the data usage gives a clear indication of the interconnectivity that underpins financial assets. When GameStop flapped its wings, it had a knock-on effect across global markets.

And one more thing, companies that generally don't generate headlines like GameStop has over the last few weeks are small caps. Take a look at this chart. Here we've overlaid usage of the Russell 2000 index of small cap companies with the price. Investors have been betting that small caps will be the big beneficiaries of economic stimulus and with the political and economic uncertainty, are more inclined to take the risk of small cap investing. You can see this reflected in the price action. Contrary to this, you can see that the average usage over the same period has remained fairly flat, even declining a little. If we look at the individual spikes in the chart, we can see that this coincides with a low in the Russell, which possibly suggests the risk-on environment has further legs despite the recent negative sentiment. Really interesting data here. Thank you for watching Data On The Data. 

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