Volatility Shifts

Terry Flanagan

An additional spurt of volatility and trading activity has left stateside electronic traders adjusting their trading patterns.

For much of late 2011, U.S.-based electronic traders have had to take volatility clues from across the pond, as news flow from once-obscure sources such as the Greek Parliament has consistently moved global markets. With the European debt situation far from settled, traders expect volatility to continue to emanate from the East.

“Volatility patterns have changed,” said John Nunziata, New York-based director of global execution services for the Americas at BNP Paribas.

Prior to the European debt crisis taking center stage, U.S. traders generally saw the most volatility and trading activity in the first and last half hour of each trading day. That was usually when the most equities shares changed hands and when the largest price fluctuations occurred.

During the second half of 2011, a new spike of activity and volatility arose during the late morning period, as the European markets closed, according to Nunziata. Because of that, there has been a re-evaluation of their algorithms.

“U.S.-based investors and the market in general are focusing more on the period after the European close,” said Nunziata. “We’re seeing increased volatility around the close, and algorithms need to take that into account.”

Traditionally, algorithms didn’t look to an additional volatility and volume spike in the middle of the day, corresponding with the European close. Taking that into account, broker-dealers have needed to take the data and adjusted the algorithms according to the new patterns.

The Vstoxx index, which measures the implied volatility of the Euro Stoxx 50, spiked in the late summer months to the mid-50s as the debt concerns in the U.S. and Europe came to a head. The index had been trading in the low 20s in late-July. The index, which trades under the symbol V2X, was at about 25 as of mid-day Feb. 6.

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