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How COVID-19 has changed the trading landscape

ETX Capital analyst Michael Baker explores how the unprecedented volatility caused by the coronavirus pandemic has forced traders to transform their approach to risk management

March 2020 will be a month forever etched in the memories of traders and investors. Though the novel coronavirus had already spread dramatically through China and Italy in the preceding months, it was March when the World Health Organization declared a pandemic and countries all around the world began entering government-enforced lockdowns, bringing capitalism to its knees and driving financial markets into severe levels of volatility.

The pandemic has had a tremendous impact on the trading landscape. Traders, just like the people operating in the markets they invest in, had to adapt to vastly different conditions practically overnight. Thinner liquidity has caused higher spreads and more extreme volatility, and markets all the world over have witnessed their worst days ever mixed with unprecedented surges, such as the largest in history of the Dow Jones Industrial Average.

Investors have faced the difficult task of trying to stay on top of their risk and ensuring they can navigate a way through an event they have never traded through before. An initial period of panic selling fuelled similar panic among traders, causing many to follow the crowd mentality and quickly unload a lot of their portfolio of investments. National authorities around the world have sought to stem this sell-off and inject some calm into the markets.

Other investors, however, have seen opportunities. The belief that what goes down must go back up has seen the reappearance of a familiar profile of traders who base their strategies on waiting for large downturns before trying to pick up a position or instrument at a low price. It has also introduced a whole new group of investors who have never traded before, but are happy to spare some savings to try to make a quick buck amid the volatility.

Moments like this, similar to past crashes, really drill down how important it is to evaluate risk

“We saw an extreme move north on both trading volumes and volatility on the back of the turmoil that was caused,” says Michael Baker, analyst at ETX Capital, a financial spread-betting and CFD (contract for difference) trading company and one of the oldest brokers in the industry. “All the indexes that traders use to measure volatility exceeded what we have seen in previous market crashes, which has of course impacted how traders approach risk management.

“All of a sudden we were seeing trading ranges ten times larger than normal on a sustained period. We’ve seen traders adjusting the way they trade by using smaller amounts with bigger stops to try and keep themselves in the markets. Moments like this, similar to past crashes, really drill down how important it is to evaluate risk.”

With demand for ETX Capital’s trading platform hitting record levels at a time when, like all organisations, it was very suddenly having to ensure all its employees can work securely and productively from home, the broker was able to provide a completely uninterrupted service. Not only did its clients face no disruption in their ability to invest in the markets and connect to assets, but ETX has also focused on providing them with continuous interaction and constant market updates and analysis through multiple media.

“Even during the most challenging of circumstances, we acted rapidly to continue offering our service,” says Baker. “Clients need the latest in risk management tools and features that help them to react efficiently when an event like this occurs. That’s what ETX can offer as a broker with over 50 years of experience. You have your own in-house platform. You receive the dedication and manpower of a personal account manager. And you have access to technology that delivers when it matters most. Clients will continue to look for reliable technology and stable companies providing a transparent and efficient service.”

For more information please visit www.etxcapital.com/en-gb

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