One day after a near record point drop in the Dow Jones, one which soaked up margin purchasing power for both retail and professional investors and put many traders in deficiency on their maintenance margins, the key question for today – according to Morgan Stanley – is who will be forced to trade?  As MS' derivatives strategist Chris Metli writes in his latest note (he has been quite busy today), it's useful to compare this episode to February.

On the other hand, the pain for the equity discretionary and quant communities is worse this time and they are sellers not buyers, and that is important because it impacts a broader community of investors.

Now the firepower to buy the dip is much lower given it is late in the year and: Crowded positions have been building for years and are likely not fully unwound Recent P/L has been the worst since February 2016 The volatility of what people own is very high How much has been unwound is the key swing factor.

There clearly has already been heavy selling across the globe as factors and themes moved multiple standard deviations yesterday and over the last week (see previous QDS pieces for details in the US, and the attached work by Rob Cronin for an excellent analysis on European flows).  But arguably there is more to come given years of positioning buildup.

Also different now is that global central banks are now withdrawing money from the economy, market liquidity has yet to fully rebound after February, and today is the peak of the buyback blackout window (vs ½ in blackout during the February selloff).

Categories: ZH