Blogs & Comment

What is “position squaring”

This morning (8:30 am, Sept. 4) I read a financial advisory that cautioned there might be some position squaring when markets opened today,the last day before the long weekend (Labor Day weekend). Apparently, position squaring can lead “to odd trading patterns.
Just what is position squaring? Its when traders close out their positions and get out of the market. They either sell long positions (causing a stock or market to fall) or buy back short positions (causing a stock or market to rise). Position squaring is also known as being flat. Here is Finopedia’s definition.
Traders who square positions want to avoid the risk something adverse to their position may happen over the days the market is closed. For example, this weekend a G20 meeting is being held and some traders may have uncertainty about what announcements will be made.
Its perhaps useful to know about this phenomenon because volatility or extreme moves on the last day before a period when the market is closed need not necessarily signal anything of fundamental importance. Its more of a technical event.
An interesting question is: can investors/traders take advantage of this pattern in some way? When position trading causes a dip in a stock or market, is it a way for the long-term investor to pick up some holdings 1% to 10% cheaper? Or can a trader profit on average by buying the dip and selling when the market opens? Or does the dip act as a signal of a bearish week to come (the risks that prompted position squaring could materialize more often than not)? A search through Google Scholar turned up relatively little.