02.23.2012

Bring On The Chop

02.23.2012

For retail and amateur traders, choppy markets can be very hard to trade as they are non-directional and require a decent amount of capital to scalp properly. Wednesday was the epitome of a choppy market as U.S. equities and respective indices traded in a tight range back and forth with no real news to speak of.

But for proprietary traders and market makers, the choppiness is welcome. It brings back much-needed volume as well as volatility to the market which is generally the heart and soul for both hedge funds and proprietary trading firms.

“On choppy days like today [Wednesday], we do well. It gives us the volumes we need and even the slight increase in the VIX is welcome,” one market making firm told Markets Media. “With markets like these, it enables us to send out more orders to the exchanges and increases the likelihood that they’ll hit.”

As recently as October of 2011, the CBOE Volatility Index (VIX) was at 45. As markets calmed and winter took hold, the VIX quickly fell below the key 30 point mark on December 8 and then below 20 on January 19. The index has had a difficult time climbing above 20 since then, indicating that traders are undeterred from driving equities higher.

That low volatility isn’t expected to be the norm for much longer, however. Traders are waiting for a catalyst to drive up volatility and the 2012 presidential election this fall will do just that. “Volatility will spike as we close in on the election,” noted the market maker. “In the meantime, it will take an event related to the Middle East or something catastrophic to drive vol higher in the short-term.”

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