Volatility on no news

By Felix Salmon
June 29, 2010
rises on bad news and panics -- as it's doing today -- on no news at all? The 10-year Treasury is now yielding less than 3%, the Dow's back below 10,000, the VIX is over 30, and the Nasdaq is down 2.4% in a matter of minutes; French stocks have fallen more than 3% today, and in general the global risk-aversion trade seems to be back on.

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What do you call a market which rises on bad news and panics — as it’s doing today — on no news at all? The 10-year Treasury is now yielding less than 3%, the Dow’s back below 10,000, the VIX is over 30, and the Nasdaq is down 2.4% in a matter of minutes; French stocks have fallen more than 3% today, and in general the global risk-aversion trade seems to be back on.

Interestingly, gold is down a little today: maybe at these levels it’s more of a risk asset than a safe haven. But more generally I think we’re seeing what happens to markets which are much more global, complex, and interconnected than they’ve ever been in the past: correlations can appear out of nowhere, and it’s silly to even attempt to explain significant intraday market movements by recourse to anything in the news.

Our brains are hard-wired to look for causality wherever we can, so if news isn’t causing this volatility then naturally we look for other explanations instead: is there something churning hard below the surface? Did a large number of hedge funds all have very similar trades, and now they’re all trying to exit their positions at the same time? It’s impossible to know for sure, but I do wonder how and whether the phenomenon of high volatility on no news correlates with the rise of hedge funds.

If you’re invested in these kind of markets, only the two extremes make any sense, it seems to me. Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.

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