Last week’s surge in volatility was no fluke, but part of a permanent trend toward faster moving markets, according to one firm that provides investors with economic data.
Phil Lynch, chief executive officer of data provider Asset Control, told Traders Magazine he believes the increased automation of trading is making markets more liquid and also more susceptible to big swings.
“I think this is a trend that will continue,” Lynch said. “People are asking, ‘When is this going to calm down?’ Never is the answer.”
Last week saw the Dow Jones Industrial Average plummeting as much as 635 points one day and rebounding as much as 430 points the next. The VIX volatility index rose as high as 47.20, though it had previously been under 20 for most of the summer.
Since markets are electronic now and trading is easier, with few encumbrances to capital flow, events like the big sw ings last week are inevitable, Lynch said. While that might be scary for some, to Lynch it means huge opportunities for firms that invest in automation infrastructure.
“The leading companies are investing in technology and automation to harvest these opportunities and take advantage of them,” Lynch said. “There’s no going back. It’s just a new world. You can’t fight automation and the ability of capital to move more rapidly.”
Instead of fighting the future, Lynch recommends firms try to harness the breadth and depth of market information available so they can take advantage of rapid movements in prices.
Front offices have already embraced automation, but Lynch said the mid and back offices have to be better equipped to handle more data, or they risk being unable to process trades at a new, more rapid rate. That could potentially cause firms to miss out on revenue opportunities.
“Just like the front end is becoming more highly automated, the mid and back offices need to become more automated as well,” Lynch said. “That doesn’t mean no people. It means people being able to manage much higher volumes of data, of information, and not just from traditional sources.”
However, not everyone is convinced the recent surge in volatility will last. Tim Mahoney, CEO of BIDS Trading, said he expects the next couple of weeks will be relatively quiet. Eventually, volatility levels will revert to the mean, he added.
“In June we were all sitting around thinking there’s not enough volatility in the world and nothing good is ever going to happen,” Mahoney said.
After below-average volatility earlier this summer and above-average volatility in August, things will eventually return to normal, according to Mahoney.
