Professional Documents
Culture Documents
Actionable lessons from 25 years of major eventsand the markets reactions to them
Predicting the market impact of everything from Fed statements to natural disasters
Separating real information from noise, major market movers from trivia
In Trading Catalysts, Robert I. Webb examines the various factors that move markets. Webb focuses
on the catalysts that spark the biggest price changesand the greatest potential for substantial
profits or losses. Using numerous real market examples, Webb demonstrates the often inconsistent
response of prices to similar trading catalysts across markets and over time, the occasional
significantly delayed response, and the frequent market overreaction.
Whether traders bet directly on a trading catalyst, on the presumed market reaction (or overreaction)
to it, or not at all, the potential impact on market prices and volatility means that all traders must
pay attention to trading catalysts and the market reactions that they induce. At the very least, the
prospect of significant volatility around some event may affect the timing of a traders entry or exit
of positions and may cause a trader to reduce his position size. If youre a serious trader, this book
will help you understand the influence of trading catalysts and identify potential trading opportunities.
Cover design by Solid State Graphics
Cover photo by Comstock
TRADING CATALYSTS
Trading Catalysts takes you into the market and recounts moment-by-moment
price action. From an almost 14% rise in the Nasdaq following a surprise Fed
rate cut to an incredible (and temporary) 22% decline in the S&P 500 futures
price following a single large sell order, Trading Catalysts is loaded with real-life
examples of how events move markets. Must reading for traders and investors alike.
WEBB
INVESTING
Press
Trading Catalysts
Size Matters
When key players unwind positions and move the markets
Market Interventions
When governments intervene: case studies, from currencies to oil
Geopolitical Risk
From elections to terrorism to wars
Fat Fingers
When trading errors and mistranslations move the market
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Trading Catalysts
How Events Move Markets
and Create Trading
Opportunities
Robert I. Webb
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CONTENTS
Preface
xv
Chapter 1:
Introduction 1
Federal Reserve Rate Cut
Announcement 1
Analyzing the Market Reaction 8
The Nature of Trading Catalysts 10
Do Perceived Trading Catalysts Really
Influence Market Prices? 18
Trading Catalysts and Market
Efficiency 21
Trading Is a Game 23
Trading Off of Catalysts 24
References 28
Endnotes 29
Chapter 2:
Chapter 3:
66
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76
Mr. Yen 79
Lost in Translation 82
Trading Lessons 83
References 86
Endnotes 88
Chapter 4:
Geopolitical Events 91
War with Iraq 91
Geopolitical Events as
Trading Catalysts 100
The Arrest of
Mikhail Khodorkovsky 102
Elections 103
May 2004 Indian Parliamentary
Election 104
The Brazilian Presidential Election
of 2002 106
1992 Maastricht Treaty Referendum
2005 European Union Constitution
Referenda 108
Terrorist Actions
107
112
119
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163
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Chapter 7:
Chapter 8:
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xi
References 324
Endnotes 325
Index
327
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This book owes its origin to my long fascination with the behavior of
speculative prices, in general, and extreme market moves, in particular. My interest is driven by both intellectual curiosity about how
news is incorporated into market prices and fascination with the
potential for large gains or losses associated with trading around
extreme market moves. This book is the culmination of many years of
observing changes in financial market prices up close, as a trader, and
at a distance, as a professor.
I was a doctoral student at the University of Chicago Graduate
School of Business when the finance faculty included Fischer Black,
Eugene Fama, Merton Miller, and Myron Scholes, among others;
and the statistics faculty included Arnold Zellnerthe brilliant
Bayesian econometrician. Chicago was the birthplace of the efficient
markets hypothesisthe notion that security prices fully and correctly reflect available information. However, the process by which
new information was impounded into market prices was largely a
black box. Although I was a student at Chicago during arguably the
peak of the influence of the efficient markets hypothesis on academic
research, the fundamental takeaway from my studies at Chicago was
not the presumptive validity of market efficiency, or any other theory
for that matter, but rather the importance of empiricismthat is,
what do the data tell us? Indeed, the theory of market efficiency originated from seemingly puzzling observations by Maurice Kendall,
Holbrook Working, and Harry Roberts that changes in speculative
prices appeared to follow a random walk.
I was a newly minted Ph.D., and an assistant professor at the
University of Southern California, when I watched silver and gold
prices sometimes rise or fall sharply on a number of days during
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the autumn of 1979. Clearly, the movements were too large and
volatile to be explained by the arrival of new information alone, as the
efficient markets hypothesis would suggest. Equally clearly, the
actions of certain traders played a key role in many of the price
moves. This episode eroded my belief in the validity of the efficient
markets hypothesis, but increased my curiosity over how news is
impounded into speculative prices.1 It also led me to secure a twoyear leave of absence from the University of Southern California and
accept an appointment at the Commodity Futures Trading Commission in Washington, D.C. in 1980.
At the time, the Commodity Futures Trading Commission was a
relatively new Federal Agency, having been created in 1974. Not surprisingly, the then-recent attempted silver corner was a common
topic of conversation among Commission staffers as were other issues
related to market surveillance. My work at the Commission gave me
an opportunity to see raw news as it was reported. The Commission
had a teletype machine that received news bulletins. The machine
was located in a hallway closet next to the water fountain. I would
stop by several times a day to read the latest news off the wires. I
quickly recognized the important role that news editors play as I
sorted through mounds of fluff for the occasional nugget of news.
However, even bona fide news did not always seem to have the predicted impact on market prices.
My career took a slight detour when I was offered an opportunity
to serve in the Executive Office of the President, Office of Management and Budget (OMB) in 1981. My boss at OMB was Larry Kudlow. The emphasis on domestic economic policy during President
Reagans first term meant that OMB was the place to be in the Reagan Administration at the timeuntil OMB Director David Stockman was taken to the woodshed by the White House for some
ill-advised comments.
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approached by the World Bank. At the conclusion of my first academic year at Virginia, I took a 15-month leave of absence to work in
the Investment Department at the World Bank in May of 1987. At
the time, the Investment Department was an active trader in fixed
income marketstrading almost as much as a primary government
securities dealer. The Investment Department managed a liquidity
portfolio of about $19 billion to $22 billion, depending upon whether
International Development Association and International Finance
Corporation funds were included. (The purpose of the liquidity portfolio is to allow the Bank to continue to perform its principal function
of lending to developing countries in the event of a financial crisis.)
These monies were invested in high-grade sovereign securities. Befitting its status and its immense trading volume, the World Bank had
direct telephone lines to the major investment and commercial
banks. I rotated around the trading desk. My experience trading on
the floor of the CME proved to be immensely valuable when I traded
fixed income securities for the World Bank.
However, the experience of trading in the Investment Department of the World Bank also presented me with a new set of anomalies to think about. One group of these anomaliesthe often
puzzling reactions of fixed income prices to scheduled economic
reportsinspired my book Macroeconomic Information and Financial Trading (Blackwell, 1994). I was fortunate to be on the trading
floor during the stock market crash of Monday, October 19, 1987
where I observed the limited (and initially negative) reaction of the
U.S. Treasury bond market to the crash. A few hours after the U.S.
stock market closed, however, Treasury bonds scored their largest
one-day rally ever in a delayed reaction to the stock market crash.
After my leave of absence was up, I returned to the University of
Virginia. In addition to writing articles for academic journals, I wrote
a number of opinion pieces for various publications including The
Wall Street Journal, the Nihon Keizai Shimbun, the Nikkei Weekly,
and Investors Business Daily. In 1994, at the request of students, I
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Endnote
1
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