Though most traders will be quick to tell you that volatility has increased in recent years, academic studies do not necessarily bear that out, though they do indicate that volatility can increase more rapidly than it did in the past.
That was the conclusion of panelists at the Investment Company Institute’s equity markets conference held on Tuesday. Speaking on a panel entitled “Are Markets Really More Volatile,” experts said volatility seems to have increased even if that cannot be statistically proven.
“My gut tells me that volatility is increasing, but when you look at the numbers, you don’t necessarily see that,” said Gregg Berman, senior advisor to the director of the Division of Trading and Markets at the Securities and Exchange Commission.
Berman said while there have been some increases in very extraordinary moves in the market, you don’t necessarily see that there has been a general increase in volatility over the last three to five years.
Eric Noll, executive vice president of transaction services at Nasdaq, said the industry might need to start thinking about volatility in a slightly different way. Instead of looking at volatility per se, he suggested looking at the change in volatility.
“What we’ve seen is the move to high volatility is very fast,” Noll said. “It’s actually the rate of change in volatility that’s more interesting than volatility itself.”
In Noll’s view, this change in volatility is exogenous to the markets themselves. In a highly volatile world in which a 24-hour news cycle can make the market turn on a dime, it is only natural that volatility can increase very rapidly, he said.
Much attention has been given to the “flash crash” of May 6, 2010, but there have been numerous other market events lately in which volatility spiked, seemingly out of nowhere. Harold Bradley, chief investment officer of The Kauffman Foundation, pointed out that on Oct. 4 the Russell 2000 shot up rapidly in only 20 minutes.
Bradley, however, was less inclined to credit outside forces for increasing the instances of rapid volatility. “The rate of change has been increasing,” he said. “I think there’s a problem with the market.”
Stephen Sachs, head of capital markets at Proshare Advisors, doubted that there was anything nefarious going on, but said that regardless of what the numbers indicate, volatility is having an effect on trading.
“As a trader, it’s difficult if not impossible for me to say volatility has not increased, but it’s not perceptible to the naked eye,” said Sachs.
Investors today, who are constantly monitoring every dip and uptick in the market, are also far more sensitive to volatility, Sachs added.
