Hi, I just heard on the news that Wall Street banks are cutting bonuses for their traders due to low return as result of low volatility. I understand low volatility creates less premium for option sellers and less room for directional traders. However, what other ways do low volatility create problem for traders?
There are many ways to trade so I don't claim to speak for all but low volatility generally results in narrow ranges and sloppier structure, making trading more challenging.
Ditto. Several/many hedge funds have closed up because of this. However... if you can tune your thinking to "the market's thingy", you can still make money. (You may not be able to make LOTS of money or as fast as you'd like... as you can only work with what the market offers. Getting a "read" on the market and adjusting YOUR behavior accordingly as a trader... that's the Holy Grail of trading.)
Higher volatility means clients are doing more trading at wider spreads which in turns means more revenues for banks and greater bonus payments to employees. Banks are like really high end brokers. They need volume to make money and volatility means more volume.
Correct, we individual traders can make "back of the envelope" adaptations of our methodology and adapt quickly but for a fund which needs to put large amounts of capital to work, it's a lot tougher. You can run a slalom course on a jet ski but not so much on a cruise ship.