OUCH.

The market is down right now.

Hard.

It’s a bloodbath out there.

Stocks down

Volatility up

Crypto hammered

Why?

A few reasons.

1) Central banks are a little confused on their stances. Jerome Powell threw the first bit of uncertainty into the market on Wednesday.

2) The Bank of England and the Bank of Japan held rates after a bit of an inflationary impulse.

3) It’s expiry day! Quad witching is a day when things get really weird in markets. Options expire and this leads to strange flows of money occurring.

4) There is something called ‘Window Dressing,’ and this is what I want to explain a bit about today since it will be unreported in financial media…

I briefly mentioned it in this tweet…

In short, there is a score banks are assigned at the end of year which determines how much regulatory capital they need to hold.

The higher the score, the higher the capital.

So what they do is wiggle and jiggle around their holdings which can cause dislocations.

Here’s another way to look at this.

Every year end, we see regulatory arbitrage (people gaming regulations) affect the volatility in the market.

A key quote from above is, ‘This has the potential to disrupt market functioning, impact the transmission of monetary policy, and amplify shocks that coincide with period‑ends (Du et al (2018).’

We have just had a weird few days in monetary policy land…

The market is not functioning…

And shocks are amplified… right at the year end.

What I am perhaps suggesting is that everything is being caused by things that are not surface level, and are mechanistic in nature.

Which would make sense as to why a simple policy statement has led to so many problems since Wednesday!