Understanding 'Axe' in Securities Trading: Key Insights and Implications

What Is an Axe?

An axe (or "axe to grind") is the interest that a trader shows in buying or selling a security that is typically already on the books. The term has evolved over the years from addressing only bonds but other securities as well.

If a trader holds a long position but has short-term concerns, that trader’s axe toward short-term put options may be significant. Likewise, if a trader has risk exposure to an increase in interest rates, they may have an axe to hedge against that risk.

Many times, a trader with an axe will keep that information private. That is because if other market participants become aware of one's motivations, they can take advantage of that information by offering unfavorable prices or withholding certain trades in order to exploit the situation.

Delving Deeper into the "Axe" Concept

The term "axe" comes from "axe to grind," meaning to have an ulterior motive. Historically, it referred to having a grievance and wanting retribution. The phrase likely comes from sharpening an axe on a grinding wheel, implying a plan for revenge.

Traders use "axe" to show interest in buying or selling a security they already have or hedging against it. The term was historically used to reference bond holdings, but traders have expanded the use to include all securities. In conversation, the term is often used to speculate about a trader’s plan with regard to a security that they hold.

Axe should not be confused with "ax," which is a market maker central to the price action of a specific security.

Practical Applications of the "Axe" in Trading

The term "axe" can be used in many different ways, which makes the context of the conversation important to consider.

Suppose that a trader has a large position in a given security. If that trader shops around for quotes with the intent of selling the stake, the trader who provides the quote may be at a disadvantage if they are unaware that the first trader has an axe with regard to the security. The second trader may ask, “Do they have an axe on this security?” which means “Do they have plans to sell this security?”

Traders also use "axe" for securities linked to what they hold. For example, a trader might hold a long position but be interested in put options if worried about short-term stock prospects.

Traders keep their axes secret because others can use this information to exploit the situation, harming the axe holder. That said, traders with good rapport may ask each other outright if they have a particular axe in the hopes that the other trader's axe(s) will be opposite from their own—this way they can affect a trade or trades with each other in a mutually beneficial manner.

The Bottom Line

Having an "axe" indicates a trader's specific interest or motivations in buying or selling securities already held in their portfolio. There's a potential for risk when making an "axe" public, as other market participants might exploit the trader's motivations.

The term originally referred to bond markets and has expanded to include all types of securities today. "Axe" differs from "ax," which refers to a market maker influencing the price action of a specific security.

Understanding references to an "axe," particularly in strategic trading decisions, can be critically important for a trader.