It started with a whimper and then a bang and then a whimper and then …
When market observers discussed volatility in 2015, the markets were seen as mostly smooth sailing, with sudden bursts of volatility that came from out of nowhere and disappeared just as quickly. Then came, August 24, when a white squall struck U.S. stock markets, shearing off most of the gains they had earned in the previous seven years. It was, in a word, huge: The DOW dropped more than 1,100 points in the first five minutes of trading.
For some investors, volatility is not a good thing, especially if they are a leveraged investor. For those that make their living in trend mediation in trading of securities, volatility is a welcome attribute in the marketplace, Tabb Groups Anthony Perrotta told Traders after the market selloff.
At this years annual Market Structure Conference of the Security Traders Association, panelists and attendees were still trying to sort out what led to the events of August 24, more than a month after the market swoon. We still have to look at the data and determine what exactly happened, said one STA panelist.
Some theories for the single largest sell-off in the economic recovery pointed to a variety of causes: a soft manufacturing report from China as the worlds second largest economy appeared to be slowing down. Other possible causes were traders near-constant fear of the Federal Reserves looming interest rate hike. (Interestingly, when Federal Reserve chairwoman Janet Yellen announced on December 16 that the Fed would raise interest rates one-quarter of one percent in early 2016, the markets actually rose on the cautious news. So much for traders and their Chicken Little fears.)
That said, external events still might have an impact on the markets: This is a presidential election year in the United States, gas prices remain very low, nations such as Great Britain are debating whether to stay in the European Union, and Vladimir Putins Russia remains a provocative agent in the Middle East and Europe. Add in the growing fear of ISIL attacks following the tragic incidents in Paris and San Bernardino, Calif., and traders have the ingredients for a skittish souffl.
Of course, some traders welcome market volatility. Thats why people become traders, one trader told us this year.
Extra volatility is always something that I dont want to say I cherish, but Im someone who likes playing in a high-vol environment, said Joe Verdi, a managing director for proprietary energy trading firm Vectra Capital. I like to trade at the bottom and top of massive moves because those times in the market are when people and institutions make decisions that are not based on real facts; theyre more based on emotion. Usually at those times, you can find value in a market that normally you would not be able to find.
Vectra Capital, which trades ethanol, is long on some things and short on other things, according to managing director Michael Cosgrove. He added that the firm does not care if the market swings up or down very much. Frankly, we dont even care if the markets are active-we can buy and sell volatility, he said.
But market volatility remains an obsession inside the trading community. According to Robert Schwartz, a professor at Baruch College, liquidity is to a market as oil is to machinery – a necessity. Ironically, financial markets, which provide liquidity to firms throughout the economy, are themselves hurt by insufficient provision of this essential oil, he wrote for Traders in late October.
And when liquidity dries up, volatility ensues.
