Ho John Lee's Weblog

Global financial markets are linked more closely than ever. Here’s a crib sheet of a few markets of interest and their opening/closing times in Pacific Time (US West Coast).

There are often interesting interactions at major market open and closes, especially during the overlap between the US market open and European market close. In addition, US index futures, particularly the ES (S&P 500 e-mini futures) also trade nearly around the clock, closing only for daily settlement between 4:15 and 4:30pm US East Coast time (plus weekend and holidays).

Note that many Asian markets have morning and afternoon sessions, and close for lunch. Different countries also observe differing practices with respect to Daylight Savings Time, so the relative timing may change seasonally. You may find it useful to check with a World Clock for the current times. Also remember that Asia begins it’s week on Sunday evening in the US, and is closed for the week by the time it’s Friday in the US.

A cautionary tale gets added to market lore. This is going to make a good movie at some point…

In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.

Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank’s “Delta One” desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

At $7.2 billion, this loss is larger than than the estimated 2006 GDP of 65 of the 183 countries tracked by the World Bank. It’s just about the entire output of Cambodia ($7.193 billion), and greater than the combined output of Seychelles, Liberia, Grenada, Gambia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Samoa, Comoros, Vanuatu, East Timor, Solomon Islands, Guinea-Bissau, Dominica, Micronesia, Tonga, Palau, Marshall Islands, São Tomé and Príncipe, and Kiribati ($6.846 billion).

I’ve noticed that the news coverage keep reporting “fraud”, which is apparently true (he made up fictitious trades with outside partners of the bank), but it mostly sounds like internal risk controls failed in more than one place.

Of course, if it had gone the other way and turned a profit, we never would have heard about it.

Looks like no one was impressed by Bernanke’s non-intervention on Thursday and the Bush/Paulson send-everyone-800-bucks stimulus package. US markets are closed for Martin Luther King Day, but the rest of the world is open, and down hard. DJ futures are showing something like -520 for tomorrow’s open, around 11586. The NYSE circuit breaker rules don’t kick in until a 10% move (1350 points), which would be somewhere around 10740. (The thresholds get reset every quarter.)

Don’t think we’ll see that tomorrow, but the way things have been going recently, it’s not out of the question. I wouldn’t be surprised to see a last-ditch central bank intervention tomorrow morning before the open, either. I think they missed their chance on Thursday, but I also don’t think the Fed has the luxury of waiting until the official FOMC meeting January 29 for their next move.

Here’s a graph of the open interest in Sep07 SPX options. Unlike your typical equity option which settle based on opex Friday’s close, most index options settle based on the opening value of the S&P 500 index on expiration Friday.

This leads to interesting dynamics like last month, when Ben Bernanke cut the discount rate just before the market open on Friday. A lot of fund managers went to bed Thursday with good looking option positions that got crushed Friday morning when S&P 500 components gapped up at the open.

Thursday SPX cash closed at 1518.75. I come up with around 1490 for max pain. (“Max Pain” is the settlement value that will result in the lowest aggregate value for the open contracts at expiration.) This, and the big run up since the unexpected 50bps rate cut on Thursday, suggest a lower bias going into tomorrow’s open, which we would see in the futures. ESZ7 (December S&P futures contract) closed Thursday at 1531.75.

Part of what makes the index options settlement interesting is that the settlement value is based on the opening trades in each of the components, and they don’t all open at the same time. It takes a huge amount of money to move the entire market around, but you can jack the futures up or down, along with selected issues in thin premarket sessions to induce a higher or lower opening cross in your preferred direction. I don’t generally attempt to take a trade based on max pain alone, but it can be useful to know where some pricing anomalies may occur. On SPX, the institutional-sized interest tends to fall at multiples of 25, i.e. 1475, 1500, 1525, which is easily visible on the graph. If the opening price gets moved to a strike, there can also be an opportunity to fade the gap, as the trade gets unwound.

The rate cut on Tuesday resulted in a lot of excitement and probably an overdone level of buying. So there are some other reasons we might see prices come in on Friday. However, it looks like the “Bin Laden Trade” (many, many Sep07 SPX 700 puts) isn’t going to expire in the money.

I take a week or so away from the markets and look at what happens…

The preface to Oscar’s e-mail this morning summarizes the current sentiment pretty well.

“Caution: This Next Trade is Not for Widows or Orphans”

Bear in mind that he’s a short term futures trader, so if you’re a buy-and-hold investor, none of this matters to you. You might enjoy his daily video commentary though.