QE Money Making Lesson #1: Maximising Market Impact

Private investors trading with valuable information go to great lengths to conceal their trades so as minimise their market impact. They try to bunch their trades during periods of high liquidity, they use stealth algorithms which drip-feed orders into the market, and they try to operate quietly under the radar.

Not so the ECB and their trusted band of merry regional Central Banks. Their mission is to maximise their market impact as they spend + EUR 1 trillion on any government securities that they can get their hands on. They don’t want best execution…they want the worst price they can find! So stay tuned to the European bond market over the next few months as there is some easy money to be made.

Thursday and Fridays’ market action is a lesson in what to expect. First, following President Draghi’s announcement of the QE bond buying program, the regional Central Banks (which are charged with the responsibility to execute the purchase program in their respective bond markets) waited 15 minutes and then placed a ‘buy everything’ order – no limit. 2:45pm in the European bond markets is not an especially liquid time of the day so the price impact was enormous. Spanish 30yr bonds jumped 5% in the space of 30 minutes. And then there was silence – the bid disappeared – but the bonds held their gains.

Friday morning, however, is the key to making money over the next weeks and months. The European bond market officially starts trading at 8:00AM Europe time but, generally speaking, not many traders are actively investing and the main buy-side firms based in London have just fallen out of bed, since its 7AM, one hour behind Europe. There couldn’t be a better time for a big buyer to maximise their market impact, could there? Sure enough the Bank of Spain hit the market like a neutron bomb. The following Bloomberg grab (15:00 Asia time is 8:00 European time) shows the early morning ‘carnavale’ in the Spanish long bond which lasted for about two hours and saw the bond rise by over 5% at one stage. And then the bid fell silent. The market subsequently managed to hold most of its gains.

So what should we expect today, Monday January 26 2015? My prediction is another opening feeding frenzy as the Bank of Spain repeats its tactics, as they will on Tuesday, Wednesday and so on and so on. These guys mean business, and the long end of the bond market is where their ability to influence prices is greatest. Once the market wakes up, prices will vault higher.

The message: buy the long end of the European yield curve NOW, especially the peripherals, and stay long. The market’s going up.