Volatility is an increasing probability.
Anyone watching the seesawing stock market over the past couple of weeks knows that extremes are the new black – a state of affairs with which investors must now start coming to grips.
“It certainly got people’s attention,” Timothy Speiss at EisnerAmper Wealth Planning, told the New York Post. “We’re going to have to see if the markets remain this choppy, with a lot of volatility.”
“With the market closing at the low end of the day’s range, expect more gyrations in the days and weeks to come,” said Greg McBride, chief financial analyst at Bankrate.com, also to the Post. As an illustration, he pointed to the recent session that saw the Dow Jones Industrials end about a thousand points below where it had started.
“The fear of rising interest rates, a more aggressive Fed, automated speed traders and a possibly overheating economy led to the volatility,” financial adviser Edward Kohlhepp told The Post.
While many point to interference by the Federal Reserve and new types of products that most investors haven’t yet gone to school on, the word that has been sending chills up people’s spines – and there is no reason to think it is going to stop any time soon – is algorithms.
Algorithmic trading, of course, utilizes automated pre-programmed trading instructions in order to execute orders that are too big to fill all at once. Such a trading method was originally conceived to help traders, who no longer had to watch a stock constantly and send small transactions out manually.
Algorithmic trading is a way to minimize the cost, market impact and risk in execution of an order. It is widely used by investment banks, pension funds, mutual funds, and hedge funds, all of which have a need to execute sizeable orders in small increments.
Maneesh Deshpande, global head of equity derivatives strategy at Barclays, told CNBC’s “Trading Nation” at the end of last week that volatility could be on the increase, reminiscent of the latter end of the 1990s.
“If you remember at that time, valuations were high, and a lot of investors knew that it was in some sense a bubble,” he noted. “But you were forced to participate because otherwise you would underperform your peers. It’s a similar situation right now, where if the animal spirits come back, then you could start to see a melt-up kind of rally, but then you will have an unusual situation where the market is going up and volatility is going up at the same time.”
By: Jeff Corman