Volatility Suppressed

Terry Flanagan

After an extended period of high volatility during the second half of last year, the markets have settled down in recent weeks.

Despite macroeconomic issues remaining, including the ongoing European debt crisis, the global markets have essentially gotten used to the uncertainty, which has lowered volatility.

“There is a lack of liquidity,” said Dan Deming, volatility trader and managing director of Stutland Volatility. “A lot of people simply are not willing to participate given the market conditions. People are just very confused. For those that don’t have to be in the market right now, a lot of them are not participating.”

Volatility normally leads to higher trading levels as investors try to keep pace with market moves. The low volatility seen in recent weeks have thus resulted in depressed trading activity. Equities trading volume has averaged about 7 billion shares per day thus far in 2012. This is down from the 8.2 billion seen during the same period last year, which was in turn down from the 9.1 billion in early 2010. This has inevitably put the squeeze on market participants, particularly exchanges and broker-dealers.

Market volatility has itself been volatile, as the Chicago Board Options Exchange Volatility Index indicated. Two and three percent intraday swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis and the U.S. debt downgrade. The VIX reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. Nearly 18 billion shares changed hands on Aug. 8. As of mid-day Feb. 7, the VIX was trading at about 18.

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