Many participants in the U.S. stock market no doubt miss the investing environment of 2017, when equities rose in a basically uninterrupted fashion, but there’s at least one group that’s thrilled about the steep gyrations that have suddenly returned to markets: traders.
The historic period of market quiet that lasted throughout 2017 was seen as something of a headache by traders, particularly short-term ones, who ride swings in both directions and tend to be more profitable when the waves in the market are bigger.
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“The direction of the moves don’t matter. Transaction costs are inelastic; no matter what, you have to pay your broker, SEC fees, the exchanges, the spread on the security. Because of that, the return you make is entirely dependent on how much the security moves. If stocks are volatile, you make a lot more,” said Manoj Narang, chief executive officer of Mana Partners, a quantitative trading firm. Narang was previously the CEO of Tradeworx, a high-speed trading firm.
While some individual securities saw big moves throughout the course of last year, broader market volatility was almost impossible to come by. According to the WSJ Market Data Group, the absolute daily percentage change for the Dow Jones Industrial Average DJIA, -0.29% was 0.31% in 2017. It was 0.3% for the S&P 500 SPX, +0.51% and in both instances, that represents the smallest absolute daily percentage since 1964. Separately, the average observed one-month volatility in the S&P 500 was lower than any other year since 1970, while the Cboe Volatility Index VIX, +1.79% also hit two all-time closing lows over the course of last year.
That environment has been nearly completely flipped over the past month. The VIX has more than doubled thus far this year, including a rise of nearly 50% over the past week alone. The index reflects bullish and bearish option bets on the S&P 500 for the coming 30 days and tends to rise as stocks fall.
“It was like watching paint dry,” said Angel Mata, managing director of equity trading at Stifel Capital Markets, referring to the market environment of 2017. “When the market was just going up and volatility was being eliminated, everyone was just sitting on their positions. But now, with the kind of volatility we’ve been seeing, that forces transactions and keeps us busy. From that perspective we’re happy to see it.”
According to the WSJ Market Data Group, an average of 8.19 billion shares were traded in each session of February, the highest daily average for a month since February 2016. In contrast, daily trading volumes over 2017 were at a three-year low.
The spikes in volatility have come on two primary themes: first, in early February, a report showed wages growing at their fastest pace in years. That led to concerns about inflation returning to markets, and that the Federal Reserve may have to become more aggressive in raising interest rates to combat such a scenario.
Shifting views over inflation and rates dictated market activity throughout the month; over the course of February, the S&P 500 saw both its best weekly performance since 2013, and its worst week in two years.
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The second theme appeared in the final session of February, as President Donald Trump unexpectedly announced he was set to impose tariffs on aluminum and steel, raising the prospect of the kind of protectionist policies that could spark a trade war. That spurred another bout of selling on Wall Street, and with it, another spike in volatility.
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“Everyone is happier when the market is moving up, but it’s good just to have the market move at all,” said Brian Battle, director of trading at Performance Trust Capital Partners. “I don’t just mean money moving for money’s sake, having volatility helps with price discovery and people get more strategic. Of course, having transaction volumes increase is always good for Wall Street.”
The quiet in stocks last year was a headwind for major financial institutions, who depend in large part on trading revenue. In September of last year, JPMorgan Chase & Co. CEO Jamie Dimon warned that trading revenue could collapse 20% as a result of the muted volatility.
That trend could be alleviated by the recent activity, and Narang pointed to Virtu Financial Inc. VIRT, +2.38% as proof of this. Virtu is a publicly traded high-frequency trading and market-making firm, and Narang suggested its stock price had a positive correlation with the level of activity on Wall Street, which in turn was highly derived from market swings.
Shares of Virtu are up more than 53% over the past month. The S&P is down 3.5% over the same period.