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Morning Note: Will Quadruple Witching Spook Markets?

Catherine Holahan of CNBC's "Fast Money"
Friday, 17 Dec 2010 | 9:46 AM ET

Will traders try to lock in profits with sells before year's end? That was the question on Fast Money Trader Guy Adami's mind this Friday morning.

Though the question arises often in the last few weeks of the year, it is especially pertinent today – aka quadruple witching day – the day when contracts for stock index futures, stock index options, stock options and single stock futures all expire. Quad-witching is known as a day of wild volume and volatility in the derivatives markets as traders unwind bad bets and try to get into better positions ahead of the new year.

“The market will be your story today with the quadruple witch,” said Drakon Capital’s Adami. “We’ll see.”

While Adami focused on the Quad-Witch, Karen Finerman was watching the frightening volatility in Visa and Mastercard. Both stocks plunged yesterday on a proposal by the Federal Reserve to cap fees that card companies charge merchants to process debit card transactions. The Fed’s proposed rule would cap the fees at roughly $0.12 per transaction, slashing them by as much as 90 percent. Analysts had expected the Fed to suggest a significantly lower 50 percent cut.

“Is what we see here going to be what we end up with?” asked Metropolitan Capital’s Finerman, referring to yesterday’s price action in the stocks, “or is it an overreaction.” Both Visa and Mastercard had recouped some of yesterday's losses in early morning trading.

Kanundrum Capital’s Brian Kelly was also paying attention to news that could spook traders. He was listening to rumors that China would increase interest rates in an attempt to cool inflation.

China’s inflation hit 5.1 percent in November. However, instead of hiking rates when the number came out — as many traders had anticipated — China raised its target interest rate to 4 percent from 3 percent, and extended higher reserve rate requirements for banks. China’s initial response to the higher-than-anticipated inflation number led many traders to believe that a rate hike was, perhaps, not in the cards for China. But, going into the weekend, traders had become less sure.

“There are the Chinese rate hike rumors,” said Kelly. “But I would view it as a positive that they are trying to control inflation.”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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