11.15.2011
By Terry Flanagan

Investors Wait for Clarity

With market volatility remaining high amid ongoing macroeconomic uncertainty, many investors await on the sidelines for more stable conditions.

Investors on the retail as well as institutional side have been feeling the effects of the ongoing volatility in the markets, while equity trading volumes may not necessarily reflect it, there are many key classes of investors sitting idle until the picture gets more clear.

“The problem we’re running into is that there’s a lack of understanding with where things are going to go,” Robert Hackel, managing director of R.F. Lafferty, told Markets Media. “Volatility is sometimes used as word to cover up the real problem, and right now the problem is with Europe.”

The most recent surge in volatility comes in the wake of the MF Global collapse as well as the ongoing uncertainty surrounding the European debt crisis. CBOE’s Volatility Index, or VIX, reached a high of 48 on Aug. 8, as the markets reacted to the U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. It then fluctuated over the next few months to as low as the mid-20s and as high as the mid-40s. As of mid-day Nov. 15, the VIX was trading at about 31.

“If there’s one thing the markets don’t like, it’s not knowing anything,” said Hackel. “Market participants want to know what’s coming, and they like clarity. That’s not coming from Europe right now.”

Some market participants also blame the volatility on some of the measures taken by central banks to try and ease the financial markets. With the advent of Quantitative Easing 1 and 2, as well as the so-called operation twist, there has been an artificial mechanism in the marketplace causing volatility. The natural ebbs and flows of the markets have essentially become a function of unnatural conditions and have been artificially manipulated.

While certain investors shy away from the markets during times of volatility, the trading volume statistics paint a different picture. During large single-day spikes in volatility, equities trading volume follows suit. The most recent case of this was on Nov. 9, when the VIX shot up 33% to 36 from 27 the day before, which coincided with a 21% increase in trading volume. Market observers note that much of that increase can be attributed to high-frequency traders, who thrive on market volatility as they arbitrage price differences between venues.

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