CashNews.co
Stay informed with free updates
Simply sign up to the Work & Careers myFT Digest — delivered directly to your inbox.
Market convulsions that briefly wiped more than $1tn from Japan’s main stock index and sent shares in megacap tech groups plummeting have been blamed on a cocktail of factors, from the unwinding of the yen carry trade to fears of an impending US recession.
But for those managing the rout, the crisis was shaped by a seasonal workplace quirk: summer holidays.
Senior investors scrambled to respond to the global sell-off from their holiday homes, and junior traders struggled to keep up with the unfolding chaos as markets plunged then recovered this week. Those left at their desks said a lack of liquidity — the volume of money shifting around world financial markets, slowed by thin staffing over the holidays — made the market ructions worse.
“It was a perfect volatility event at the worst possible time . . . If everyone’s away for the summer and you don’t have enough liquidity when something like that happens, you’ve got a big problem,” said Dan Scott, head of the multi-asset boutique at Vontobel. “Everyone was stuck in the same trades and then suddenly we had a change in the paradigm.”
The few traders not yet sunning themselves in warmer climes — and able to answer the FT’s calls — described frantic office scenes on Monday as Japan’s Topix index suffered its sharpest sell-off since October 1987.
“One guy I know was going to see the field hockey at the Olympics, on the Eurostar,” said a merger arbitrage trader who asked to remain anonymous. “He went into the tunnel and he had no connection right when contagion was spreading. Eurostar’s WiFi or lack of it probably cost him millions of dollars.”
The workplace phenomenon of an August slump — when productivity dips as temperatures rise, schools close and staff go on holiday — is familiar in many sectors. In hospitals, some studies suggest mortality rises at the height of summer, in part because doctors are on leave and freshly-graduated medics make a start on wards.
In finance, skeleton staffing and illiquidity in August bringing greater volatility has become a market truism. But there is some data to back up the cliched advice to “sell in May and go away”.
One study of 51 stock markets by Princeton and Columbia academics “confirm[ed] a widely held belief that stock turnover is significantly lower during the summer because market participants are on vacation”. Returns were lower, too. Another dubbed liquidity shifts linked to national holidays, including negative returns preceding them, the “festivity effect”.
Ahead of Monday’s historic losses liquidity was “draining from the markets across all assets”, according to Citi analysts. The group said in a note to clients this week that buy and sell orders in the Treasury market were running at 30 per cent of the usual depth. Illiquidity “is even more extreme” in US equities, they added.
“The summer effect is big,” said Rich Rosenblum, co-chief executive of crypto market maker GSR, who added that listings for new alt-coins are at multiyear lows. “If we were to have 10 listings this week I’d call some of my guys and girls back from summer to help. But we have no listings.”
One junior trader at a hedge fund in the US told the FT that their manager remained on holiday and left them to respond alone to some of the worst market turbulence in years, including managing severe losses.
An out-of-office reply from a trader at a large European bank featured a picture of US hip-hop artist Snoop Dogg looking aghast — sunglasses held above his head in shock — with the caption “me returning from holidays and watching the market open”.
Guy Stear, head of developed markets strategy at Amundi, said “you should be somewhat suspicious of violent market moves” in the first week of August.
A range of complex factors — from the carry trade unwind to geopolitical uncertainty and disappointing tech earnings — have been responsible for denting investor risk appetite, say analysts. However the magnitude of market moves “is perhaps as much about the lower liquidity we see at this time of year as the scale of any reset in sentiment or economic outlook”, said Oliver Blackbourn, portfolio manager at Janus Henderson.
One broker at a Japanese investment bank said several of his colleagues had cancelled holidays they were due to take next week. Others described highly charged office atmospheres, as colleagues, who had disengaged for the summer, reconnected with work. “We do an internal call every day, usually about 100 people join. [On Monday] we had 300 — in August,” said Max Kettner, chief multi-asset strategist at HSBC. “That tells you something about the mood right now.”
But there were pockets of calm elsewhere. One currency trader at a large European lender said their desk was “actually not that busy” even as prices for bonds and risky assets swung wildly.
“Unless you have risk on and are getting out, people tend to sit back and watch on days like that,” they said. “Otherwise it’s like trying to catch a falling knife.”
Additional reporting by Nikou Asgari in London, Leo Lewis in Tokyo and Arjun Neil Alim in Hong Kong
Join Robert Armstrong, chief US financial commentator, and FT colleagues from Tokyo to London for an August 14 subscriber webinar (1200BST/0700EST) to discuss the recent trading turmoil and where markets go next. Register for your subscriber pass at ft.com/marketswebinar and put your questions to our panel now.