Wall Street Fear Gauge Near Record Lows

Historically, when the market is in a positive upswing, volatility will decrease, and conversely when volatility increases market performance usually decreases as investors experience greater risk.  The volatility, or fear gauge, has a direct impact on wall street returns and performance.

With the current fear gauge near record lows, we continue to wonder how long the market will remain this calm.

HFT on the Rise

High Frequency Trading (HFT) has increased to the volume of approximately half of all wall street trades.  With this rise in HFT and fewer market participants, when the market swings the other way we could see the impact with a large correction.  

With the level of HFT at record high levels it seems that HFT activity along with fewer participants will contribute to future wall street performance, and possibly direct rather than react to the volatility.  

Passive Investing

Passive Investing occurs when investors place their money in ETFs or index mutual funds instead of actively managed funds, and has been increasing over the last decade.  A recent report from Moody’s Investors Service states that over 28% of assets under management are in passive investments at the current time, and expects that by 2024 that number will increase to over 50%.

Passive Investing can soften volatility as new funds are continuously deployed into the same stocks, rather than moved between sectors, or out of stocks entirely into bonds or cash or commodities.

The new Fiduciary rules, in place since June 9, will make passive investments even more attractive, given the risk of higher fees and underperformance by actively managed funds.

More Frequent Option Expiration

Options on U.S. Stocks used to expire once a month or once per quarter, but now SPX, the index that tracks the S&P 500 stocks, has options that expire three times per week with some days having morning and afternoon expirations on the same day.  These all give investors new methods to offload risk in any time frame, lessening the need to buy and sell in the open market to adjust their positions.  Moreover, investors fine-tune their bets to the point that they don’t need to overreact to market moves, which can create volatility.

Great Point Capital has been serving the trading community since 2001.  Our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your trading performance.  To earn to your maximum potential in times of low or high volatility, contact us today to speak with one of our experienced traders.