Breadth is Strength

Vol #24- February 5th, 2021

When the kings fall off their perch, it’s cause for celebration in the markets.

By kings I don’t mean the hedge fund suits that have been pilloried by retail traders everywhere these past weeks. While that too is good - markets thrive because the Game Never Stops - I’m talking about the declining dominance of top tier ETFs.

With increasing interest in options strategies bringing more volume to the marketplace, the market is maturing, and seeing a breadth of interest beyond these ETFs. The NYSE published their Q4-2020 volume stats the other week, and in December SPY volume was at its lowest relative position since 2011 - only 10.4% of the market. This was down from a concentration high of almost 25% during March of 2020. Its annualized rate was down 3 percentage points to 12% overall.

The names that are rising in popularity are single name companies - AAPL, TSLA, and NIO. As the pie grows, its composition is changing. Breadth of liquidity, is extremely bullish for market structure and opportunities.

More volume in more names means better pricing. It means current strategies can take advantage of reduced slippage and better trade exit and entry points. If AAPL options get just three pennies tighter, opening and closing a 10 lot butterfly gets $250 cheaper every month. That’s enough to make that an 11 lot next time.

Better market structure also creates new opportunities. Where pricing may have been prohibitively inefficient before, new strategies and volume will come to the market. Creating single name structured products becomes increasingly close to reality. With better opportunities to manage capital, the market will continue to mature with positive feedback loops. Liquidity begets liquidity.

Market structure is extremely important to Harvested Financial. We chose to base our Model Portfolios on the benchmark names of QQQ, SPY, and IWM because of their deep liquidity. More volume means better markets for us to execute our strategies. They’re so efficient, that the tightness of options markets overcomes the higher fee costs of the underlying ETFs.

The historical concentration of volume in these popular products, means that they are the first names to provide the granular market structure to precisely execute strategies. In addition to tight spreads, strikes are listed every dollar to allow for precisely tuned risk.

As more products grow in volume, they too will see the benefits of better liquidity and pricing. When the kings of volume lose their relative dominance, it richens the opportunities for all investors.

Thanks for joining us,

Mark Phillips
CEO

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