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Market Swings Are Becoming New Standard

Louise Story and Graham Bowley|The New York Times
Monday, 12 Sep 2011 | 10:59 AM ET

The stock market just can’t seem to make up its mind.

NYSE trader
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NYSE trader

Day after day, stocks swing sharply by hundreds of points. Last week they tumbled 3 percent in the first 90 minutes of trading on Tuesday morning, then on Wednesday closed nearly 3 percent higher and dropped almost 3 percent on Friday. All of this on the heels of unusual back-to-back 4 percent leaps and dives in one week in August.

Now traders head into the week with fresh worries about the chances that Greece will default on its debt and the havoc that would wreak on European banks.

All of this anxiety has caused experts to ask whether there are new forces at work in the stock market that make trading permanently more erratic.

In fact, big price moves are more common than they used to be.

It has become more likely for stock prices to make large swings — on the order of 3 percent or 4 percent — than it has been in any other time in recent stock market history, according to an analysis by The New York Times of price changes in the Standard & Poor’s 500-stock market index since 1962.

Some experts see volatility as a problem because it can scare investors away from the markets, make companies reluctant to go public and undermine confidence in the economy, causing further drops in shares.

But another viewpoint is that stocks are rightly volatile now because there is so much uncertainty about where the economy is heading — and canny investors could profit from the big swings, or simply sit them out until the market eventually finds equilibrium.

“It’s neither good nor bad,” said Michael Schmanske, head of United States index volatility trading at Barclays Capital. “It is a measure of high opportunity but also peril.”

So what’s causing the rise in the big bounces?

It’s hard to know for sure, but market analysts point to new types of souped-up computerized trading and extraordinary global economic turmoil — from protests over a second bailout for Greece to the downgrade of United States debt.

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It is also possible that stocks simply move faster today because of the quicker pace of news and trading, and so drops and surges in prices that might have been spread over days in past times are now condensed within hours.

Some economists say they fear the volatility may feed upon itself. The violent ups and downs, said Robert Shiller, an economics professor at Yale, may in turn undermine confidence in the economy, and the weakness in the economy can lead to more strident politics — all of which feeds the volatility loop.

“It is not well understood why we have these bursts of volatility," Mr. Shiller said. “It seems that in these rare periods of bad economic performance and anxiety about the economy, we have volatility in the markets and high volatility in the political arena. Bad things can happen. This worries me.”

The Times looked at two sorts of historical data — the closing prices of the S.& P. 500-stock index as well as the highest and lowest points the index reached during each trading day. Both measures, from 1962 through the end of this August, painted similar pictures of the market — it rises and falls more now in greater size.

Since the start of this century, The Times found, price fluctuations of 4 percent or more during intraday sessions have occurred nearly six times more than they did on average in the four decades leading up to 2000. The price swings today may feel even more notable because the 1990s represented a relatively calm time for trading. In contrast, price fluctuations of 1 percent and more during intraday trading were more common in the 1970s and 1980s.

As for closing prices, the more-frequent jumps could also be clearly spotted. Thirty percent of trading days since the start of 2010 were up or down more than 1 percent at the time of the closing bell. That’s far more than the 20 percent of such jumps in the 1990s. The trend toward greater volatility is more pronounced in larger price moves.

The new normal?

Regulators at the Securities and Exchange Commission have been looking at changes in the markets and automated trading strategies in connection with volatility. The market is no longer based on one single exchange but is fractured across four big exchanges and several smaller forums. High-frequency traders, using powerful computers to trade at exceptionally high speeds, now account for up to 60 percent of daily turnover.

And in the last decade, exchange-traded funds have become a large factor in trading, after hundreds of billions of dollars were poured into them. Those funds — like mutual funds, but traded daily — tie their values to indexes or bundles of stocks rather than individual companies.

But even as financial problems simmer in America and abroad, officials have yet to pinpoint exactly why stocks seem to move more quickly and to greater extremes.

Some financial historians question whether the markets are in a “new normal” of permanently heightened volatility.

“The last few years have been the most volatile for all of recorded history,” said Andrew Lo, professor of finance at the M.I.T. Sloan School of Management. For evidence, he says that 10 of the biggest 20 daily upswings and 11 of the largest 20 daily drops since the beginning of 1980 to the end of last month have occurred in just the last three years.

Some analysts shrug off the big swings, saying all that matters is where prices land in the longer run, not each day. After all, the S.& P. 500 index is roughly where it was a year ago and, after the roller coaster of August, finished less than 6 percent down.

“The best thing people could have done last month is nothing,” said Alec Young, an equity strategist at Standard & Poor’s Equity Research. “We don’t think that it’s a smart way to manage to be taking the temperature every day because you’ll be trading your portfolio till the cows come home.”

And volatility may not herald dips in prices — a study by Sam Stovall, a strategist at S.& P. Equity Research, found that markets since 1950 have typically been calm just before the highest consecutive price declines. But, he found, volatility goes up after prices start going down and the markets can remain nervous while prices recover.

Some longtime market observers attribute the skittishness to aftershocks of the 2008 financial crisis.

“When there is uncertainty in the world, there is uncertainty in the market,” said James J. Angel, a professor of finance at Georgetown University. “After a big shock, it takes years for the markets to settle down.”

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