(EXECUTION MATTERS is a Traders Magazine content series focused on the topics most important to traders and technologists in US equities and options markets. EXECUTION MATTERS is produced in collaboration with Lime Trading Corp.)
As business winds down for the year-end holidays, it’s commonly perceived that trading activity in equity and options markets is also quiet.
But while aggregate volume numbers may trend lower over the few weeks spanning mid-December to early January, and many senior institutional traders are home with family or on vacation, there are several items of significance on the calendar that market participants need to stay plugged in for – especially this year.
First, the Federal Reserve concluded its final meeting of 2024 on December 18, lowering its benchmark interest rate by 25 basis points while also signaling a slower pace of rate cuts in 2025. That guidance sent stocks lower.
Then, quadruple witching, or “quad witch” day on Friday, December 20, will see the simultaneous expiration of four major financial instruments: stock index futures, stock index options, stock options, and single stock futures.
The concurrent expiration of the derivatives contracts typically results in higher trading volume and market volatility, while also impacting the short-term valuation of securities.
December 20 is also a big day for index rebalances, with the S&P 500, S&P 400, S&P 600, and Nasdaq 100 set to add and remove certain companies to ensure the respective indices stay properly balanced in light of current market conditions. Index rebalances can result in significant trading activity as fund managers benchmarked to indices buy and sell stocks to maintain their desired exposures.
And there’s the end of the fourth quarter and the end of 2024, which both fall on the shortened trading day of Tuesday, December 31. There is often increased trading activity on the last day of investment reporting periods, as fund managers finalize their portfolio positions for year-end reporting and calculations, as well as tax considerations.
Johan Sandblom, President and Head of Business Development at agency broker and market access provider Lime Trading Corp., noted that all these events are happening as market participants re-position for the upcoming change from a Democratic to a Republican presidential administration, and also the “Santa Claus rally” calendar effect that typically sees stock rise in the last five trading days of December and the first two trading days in January.
The S&P 500 Index has gained 27% year to date as of December 17, though it has been about flat this month. “The first half of December historically isn’t all that great,” Ryan Detrick, Chief Market Strategist at Carson Group, told Yahoo Finance on Dec. 16. “It’s the second half of December” that has driven positive returns in nine of the past ten election-year Decembers, he said.
“It is a misconception that there is nothing going on in the markets in December,” Sandblom told Traders Magazine. “At Lime, it is all hands-on deck during this active and volatile month.”
