I agree. But I dispute whether those traders cause additional volatility. Afterall they're still in biz as we speak and vol sucks. I do think though that there was clear correlation between the demise of bullets and the shallowness of the breaks. My overriding point is this. Over different generations, venues, nations and asset classes, the psychology and nature of price movements has been repeatable. Tulips exploded upwards even without a downtick rule. Look at the ATR of SPX back in 1994. That was a pit traded contract with antiquated technology on the customer end, yet 3 pt ranges on a index priced at 450 was the norm. Pretty much the same pct. ranges as today.
volitity IMHO is created by fear and uncertainty. NOT PROGRAMS. Look at the Asian crises, and the last few months of the BULL market. Fear and Uncertainty cause huge volititly. Greed can cause a trend....like the last 7 months of the BULL market, and there was some good volitilty cause by Greed as well. Complacency will cause low volititly until fear enters the picture. So, IMHO emotions cause volititly, the more emotion you have the more volititly you have. However, dont confuse volititly with VOLUME....
What caused the volatility in the past few years? High tech bubble, accounting fraud, terrorism.... I'm wondering what are the future events that would break the current luke warm market, and how long will the current involatility last?
Nanotechnology bubble coming right up could be too small to see! Could be like Mr. Market = Huge! Either way as long as there are at least 3 traders trading - all 3 won't stay in agreement very long about what prices should be. So why should the markets be flat for very long. Something has to kick program trades into gear - and what's all this talk about trading against them - consider trading with them. The more that pile on in one direction the stronger the move - are these programs designed to catch a falling knife continuously or something. I doubt it. If the markets start moving strongly in one direction then the programed trades that traded against it would get their heads handed to them on a plate, no? The markets will still move - especially in a macro sense - as long as the future is perceived to be brighter by the majority the markets will go up and as long as the future is perceived to be bleak the markets will go down. Periods of high volatility will be followed by periods of lower volatilty and vice - versa. (pick the timeframe of your choice) Fear and greed - supply and demand - will not be killed by program trading. Maybe a complete world economic breakdown would flatline the markets to the point of not being tradeable intraday but that's a topic for another thread.
Pabst- If it was anyone but you I would say wrong. But I ask you this. Starting in 96 I watched a a samll basket of nyse that were part of index mutual funds. By observations we wound up knowing which ones they came for during futures moves. Lucent compaq exxon, then emc ibm drugs and a few others. So after buy tech sell drugs it was see S&P move or naz 100 move and buy one of the targets. There would be sometimes great amounts of stock because of vwap traders trying to get out up 5 cents on offer. We would take and flip out after NYSE specialist spread market to accomodate program. later as things got more competitive I learned to anticpate programs and specialists. Then minis came out and people started talking about what we were doing which was basically manually arbing and letting specialist overshoots make money for us. Minis allowed more guys to put up offers and and cruch the specialists ability to spread the market for his and our benefit. So my theory is that ecns, minis and computer took the manual arb game away. And that those factors also sucked out the volitility. I have to go I could have written more and I could have written more intelligently but I banged this out fast.
Also, something changed bigtime over the last 18 months. Instead of an institution placing an order to buy 7k shares of a stock. They are placing 10 orders to buy 700 shares over say a 20 minute period. Its this type of "program" thats killed trading. Individual orders are no longer a determinant of price. There are no plus tick large bids or large offers supressing the price. No aberations. The price is what it is and is the "fair" price. Arbed perfectly down to the penny. To make money now you have to have a system that forecasts where a stock is headed 15 to 30 minutes down the line or farther. And that is no easy game! Extremely difficult, but not impossible.
All of these factors: ECN's, futures, and computerized trading were in place during the 1999-2002 mega volatility trade. Would it surprise you Jem if I stated that futures traded a higher percentage of notional volume vs. stocks in the 1980's than today!
Silk, you're observation's are true. However I think in panic breaks of which we had quite a few from 2000-Mch 2003, traders are apt to puke in chunks. It's hard to massage that liquidation in JNPR when the stock's in your face 20pts a day. Buyer's tend to be more price discriminating than sellers. Unless of course those buyers are shorts ala' Friday morning. I thought those prints in GE were mis prints!