Computerized Trading - Market Volatility
Wall Street's recent wild ride wasn’t driven by nervous portfolio managers or any other human traders. Instead, machines are making the trading decisions. On a typical trading day, computers account for 50% to 60% of market trades. When the markets are extremely volatile, they can make up 90% of trades.
The Dow fell nearly 1,600 points (-.62%) at one point Monday, February 5th, before recovering more than 400 points to end the day down 1,175 (-.31%). On Tuesday, the Dow opened down 567 points, then raced to a 350-point gain shortly after.
Humans did have a role in the stock market's moves. A stronger-than-expected wage increase in Friday’s jobs report led investors to make trades based on the assumptions about what that might mean for inflation and the FED’s actions going forward. But once they gave the stock and bond markets that initial push, the computers took those initial moves and ran with them.
The program trading that sends stocks down so quickly can send them up just as fast. That's one reason why the market came off its lows and rebounded more than 400 points late Monday. It's also probably why markets opened down more than 500 points Tuesday, only to jump several hundred points in the first hour of trading.
It is important to remember that market volatility is not a new phenomenon. Although most years the market posts positive gains, since 1980 (38 years) the S&P 500 has experienced an average intra-year decline of 14%.