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Market Movers

In his new book, Trading Catalysts, Professor Bob Webb explains how events move markets—and create trading opportunities.

“I’ve always been interested in how new information is reflected in market prices,” says Professor Bob Webb, when asked about the inspiration for his new book, Trading Catalysts (Financial Times Press, 2007).

Webb says it was the Hunt brothers’ fabled attempt to corner the silver market in 1979 and early 1980 that initially piqued his interest in the subject. At the time, Webb had just earned his Ph.D. in finance from the University of Chicago, where he’d studied under such luminaries as Eugene Fama, Merton Miller, Fischer Black, and Myron Scholes, all early proponents of the “efficient markets” hypothesis (the notion that security prices fully and correctly reflect available information). “I was watching these tremendous changes in silver and gold prices,” Webb says. “It was amazing—you’d see daily price changes that were just too large to be consistent with new information entering the market.”

Looking for Causes
It was the dramatic unraveling of the Hunt brothers’ scheme—following Bunker Hunt’s storied plane trip to Paris—that spurred Webb in 1980 to seek work at the newly formed Commodity Futures Trading Commission in Washington, D.C., where he hoped to gain some insight into how news is reflected in speculative prices. From there, Webb’s quest led him to work in the Office of Management and Budget, under President Reagan; as Senior Financial Economist at the Chicago Mercantile Exchange; and as a trader in the Investment Department at the World Bank. (In between, he somehow found time to teach, first at the University of Southern California and then at McIntire.)

“I noticed that a lot of people were approaching the market from a different perspective,” Webb says. “They were looking at trends and so-called technical analysis to make trade decisions, but I thought that what would really be interesting would be what causes large price moves—and that is what my book is about, driven by an initial interest in how prices reflect information.”

Examining Effects
Trading Catalysts provides an in-depth examination of market-moving events of all stripes—from comments by policymakers and politicians, to geopolitical events, terrorism, economic reports, company announcements, and weather and natural disasters. Webb discusses not only the ways in which events affect markets, but also the speed, direction, magnitude, and duration with which they do so.

Webb says he wrote the book with a broad audience in mind—everyone from individual investors to institutional money managers and traders. “Everyone’s interested in large price changes,” Webb says. “Or, to put it a different way,” he jokes, “everyone’s interested in making a large amount of money in a short period of time.”

What’s critical, Webb writes, is that market participants understand the trading opportunities created by all different kinds of events. Writes Webb, “Knowing the likely source of selling pressure in any break allows traders to ascertain whether a price decline is overdone…this allows traders to position themselves for the potential subsequent rebound in market prices and assess the potential magnitude of the rebound in prices.”

Curiouser and Curiouser
Accordingly, Trading Catalysts not only looks for the underlying reasons behind market catalyzing events—but also for their not-so-predictable effects. Most of the time, for instance, market prices react quickly to news. However, some events, such as the (presumptive) election of Sonia Gandhi to prime minister of India in 2004 or the Kobe earthquake of 1995, cause markets to move only after significant delays in time. (The Indian stock market crashed a week after Gandhi’s election; likewise, the Japanese stock market waited a week before swooning from the quake.)

Believe it…or not
Often, too, Webb points out, the very same events will have different effects on the market, depending simply on market participants’ interpretation of those events. An example of this phenomenon, Webb says, is the trade balance report (more commonly referred to as the “trade deficit report”). “During the 1980s, this was a key economic report—more important than the employment report,” Webb says. “There was a period of time when the trade deficit report would come out, and you might have the bond market move by 3 points, up or down, which is a huge movement in the bond market.” In 1987, Webb says, a larger-than-expected trade deficit would drive bond prices down. But in 1986, market participants’ interpretation of the same kind of news would drive bond prices up.

These days, Webb says, market participants no longer see the trade deficit report as significant at all. “How many times have you heard stories about the trade deficit report affecting financial markets in recent years?” he asks.

Where We Go from Here
What about the impact of today’s rapid-fire news and information cycle? “We have better technology and lower transaction costs,” Webb says, “and both of those combine to cause faster and possibly more violent reactions in market prices. The world has changed, but the fundamental nature of people hasn’t.”

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