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Less Volitility in Modern Markets?

  • #1
  • First Post: Jul 11, 2007 5:18am Jul 11, 2007 5:18am
  •  Trader#0000
  • | Status: Unregistered Trader
So I was at a presentation the other day discussing the future strategy of the bank that I work for. One point that was made was that the performance of the trading side of the business has slid over the last decade or so.

This was attributed mainly to a decrease in volatility in international markets in recent years. The explanation for the decrease in volatility was an increase in market competition - in particular hedge funds, trying to profit from and squeeze every tick.

This also reminded me of an article that was posted on this forum a wee-while ago that described how automated trading systems were also contributing to a overall decrease in volatility.

So it has me wondering, I am still quite green when it comes to trading, and am wondering if this is real or imagined? Have those who have been trading for some time have also noticed this? And what does this mean for those wants a future in trading?
  • #2
  • Jul 11, 2007 7:22am Jul 11, 2007 7:22am
average daily range of gbp has fallen alot
100% of traders are losers. Just that some win more than they lose!
  • #3
  • Jul 11, 2007 8:23am Jul 11, 2007 8:23am
Personally, I prefer low-volatility market, and I do think it's better for trend trader.

any comments is appreciated

regards
Trading is a business
  • #4
  • Edited 8:48am Jul 11, 2007 8:33am | Edited 8:48am
i tend to agree with the theory that markets become less volatile when the participants become "smarter" and more sophisticated. smart traders will step in to "correct" a large move if they feel the move is overdone, whereas the less sophisticated traders will get panicked by the large move and pile on to make the move even bigger.

an extreme example of this is the london subway bombing in 2005. if you watched the futures market during that fiasco, you saw a huge reaction (the panic) but then 20 mins later the smart players stepped in and bought, knowing that the bombing would have little effect on the economy. after about an hour, the price was where it was before the bombing. these smart players subdued what could have been an extremely large move caused by panic.
Relax and be happy.
  • #5
  • Jul 11, 2007 8:55am Jul 11, 2007 8:55am
Quoting merlin
i tend to agree with the theory that markets become less volatile when the participants become "smarter" and more sophisticated. smart traders will step in to "correct" a large move if they feel the move is overdone, whereas the less sophisticated traders will get panicked by the large move and pile on to make the move even bigger.

an extreme example of this is the london subway bombing in 2005. if you watched the futures market during that fiasco, you saw a huge reaction (the panic) but then 20 mins later the smart players stepped in and bought, knowing that the bombing would have little effect on the economy. after about an hour, the price was where it was before the bombing. these smart players subdued what could have been an extremely large move caused by panic.
Very interesting. But wouldn't you agree that as the participation grows, there will be more "dumb" traders than sophisticated, "smart" ones? Also, how exactly has volatility decreased since 10 years ago? I thought the introduction of retail brokers and automated trading ADDED to the liquidity (ergo volatility) of the market. But I agree cable having a few lousy summer weeks, everybody is on the beach
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #6
  • Jul 11, 2007 9:12am Jul 11, 2007 9:12am
I tend to agree here as well. Intuitively, I think increased sophistication is going to at least lead to an increase in efficiency. The more individuals who are analysing the market, the more efficient the market is bound to become. Whether or not this carries over to volatility is another question.

Higher volatility is a double-edged sword. It can erode long-term returns, but it gives you more chances of hitting grand-slams. If you're swinging for the fences, you definitely want more grand-slam chances. If you're risk-averse, lower volatility is a better fit.

More empirically, lots of large traders rely on pricing inefficiencies where arbitrage is possible in order to profit. Today, with the large amount of sophisticated players all with access to (almost) the same information and knowledge to exploit that information, arbitrage and inefficiency plays become harder to achieve. I wonder if this carries over to the situations Merlin quoted about more sophisticated investors not only exploiting arbitage instances but "overblown" pricing reactions.

Perhaps economic data is more available and the conclusions drawn about the future expectations of said data are more reliable in the present. Perhaps prices (market sentiments) are not subject to the extremes they once were when traders suffered more severe "belief revisions" due to inaccurate, untimely information and shoddy analysis?

A very interesting point to speculate on in deed (IMO).

I have read some articles on forex markets becoming less volatile, but the reasons for which were not concretely determined. I doubt it is the small players - according to the often-quoted figures, small traders account for only 2% of the trading volume in foreign exchange markets.

-=DAVE=-
  • #7
  • Jul 11, 2007 9:38am Jul 11, 2007 9:38am
Quoting megadave5000
I doubt it is the small players - according to the often-quoted figures, small traders account for only 2% of the trading volume in foreign exchange markets.
Good post, but if you read anything with scepticism (and you should these days, unfortunately) don't forget that they said it's 2% years ago as well, and since then there has been and there is a boom in retail forex brokerage and trading! I think that 2% is growing fast, like the USD is falling these days

IMO yes, it's less volatile, but somehow it's safer too for my trading style. I like it better now.
  • #8
  • Jul 11, 2007 9:55am Jul 11, 2007 9:55am
Quoting MarkGavalda
Good post, but if you read anything with scepticism (and you should these days, unfortunately) don't forget that they said it's 2% years ago as well, and since then there has been and there is a boom in retail forex brokerage and trading! I think that 2% is growing fast, like the USD is falling these days

IMO yes, it's less volatile, but somehow it's safer too for my trading style. I like it better now.
Thanks Mark!

I think you're probably right, very probably right in fact. The 2% is likely higher today. I would be surprised if it were not. I totally agree about reading things with a sharp eye out for critical reasoning and skepticism. Hence, I used the term "often quoted" to describe the two percent figure instead of some other, more affirmative adjective hehe!

Also, the volatility decrease is very beneficial for me as well. A slap-happy currency pair flying all around the place makes my head spin! As my grandfather always told me: easy does it.

-=DAVE=-
  • #9
  • Jul 11, 2007 10:20am Jul 11, 2007 10:20am
Quoting megadave5000
I tend to agree here as well. Intuitively, I think increased sophistication is going to at least lead to an increase in efficiency. The more individuals who are analysing the market, the more efficient the market is bound to become. Whether or not this carries over to volatility is another question.

Higher volatility is a double-edged sword. It can erode long-term returns, but it gives you more chances of hitting grand-slams. If you're swinging for the fences, you definitely want more grand-slam chances. If you're risk-averse, lower volatility is a better fit.

More empirically, lots of large traders rely on pricing inefficiencies where arbitrage is possible in order to profit. Today, with the large amount of sophisticated players all with access to (almost) the same information and knowledge to exploit that information, arbitrage and inefficiency plays become harder to achieve. I wonder if this carries over to the situations Merlin quoted about more sophisticated investors not only exploiting arbitage instances but "overblown" pricing reactions.

Perhaps economic data is more available and the conclusions drawn about the future expectations of said data are more reliable in the present. Perhaps prices (market sentiments) are not subject to the extremes they once were when traders suffered more severe "belief revisions" due to inaccurate, untimely information and shoddy analysis?

A very interesting point to speculate on in deed (IMO).

I have read some articles on forex markets becoming less volatile, but the reasons for which were not concretely determined. I doubt it is the small players - according to the often-quoted figures, small traders account for only 2% of the trading volume in foreign exchange markets.

-=DAVE=-
Hi Dave!

Great post, and I think with respect to the stuff I emboldened, the answer is that these are still exploited. In fact, I don't know about "sophisticated" traders, but I exploited yesterdays overblown selloff very easily, and I'm an awfully simple kind of guy

I think once people have been in the market for a while they come to recognize pull-back points pretty quickly, although I have never worked in a bank and have only heard nasty things about the intelligence of the traders who do

-Ahmed
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
  • #10
  • Jul 11, 2007 6:42pm Jul 11, 2007 6:42pm
Quoting Plutonite
Very interesting. But wouldn't you agree that as the participation grows, there will be more "dumb" traders than sophisticated, "smart" ones?
yes there may be more dumb traders, but the volume from the smart ones will be overwhelming. and the more participants that are in the market, the harder it is to find the inefficiencies. a market with 10 players has more inefficiencies than a market with 10million players.

this made me think of another point...a market with more players, even if they arent smarter, may tend to be less volatile, simply by the fact that there are so many different strategies being traded.
Relax and be happy.
  • #11
  • Jul 11, 2007 6:46pm Jul 11, 2007 6:46pm
Quoting megadave5000
The more individuals who are analysing the market, the more efficient the market is bound to become. Whether or not this carries over to volatility is another question.
ive always had the feeling that volatility was the cousin of inefficiency...when markets are crazy, there is always some little inefficiency to grab, but when markets are slow, steady and old, its not so easy.
Relax and be happy.
  • #12
  • Jul 11, 2007 8:16pm Jul 11, 2007 8:16pm
There does seem to be some drop, depending on how one deines the volatility, and in terms of what periods one is comparing. But a big source of volatility has been removed as more financial instruments are traded both programmatically and electronically, as the delays that used to slow price discovery are significantly reduced. OTOH, it may indicate a distinct lack of robustness in the system as a whole, since as the level of noise goes down, the sensitivity of algorithms (both human and machines) tends to go up, and people increasingly underestimate risk, and big trading institutions in particular leave themselves open to catastrophic losses.
  • #13
  • Last Post: Jul 12, 2007 5:07am Jul 12, 2007 5:07am
  •  Trader#0000
  • | Status: Unregistered Trader
Actually come to think of it, the book I am currently reading - Trading Rules: Strategies for Success by William F Eng, touches upon this subject (also a great book IMHO). He was there when options trading was first introduced on the floor of the major US exchanges.

He discusses how at first anybody and everybody was making money trading options, initiating simple strategies such as buying/selling straddles, collars and spreads. However as more participants came into the market and more sophisticated strategies developed, the efficiency in the market eroded much of the 'easy' profits.
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