NEW YORK—“Market volatility in recent years has not been unusually large compared to historical norms,” attested Eric Noll, executive vice president, transaction services at NASDAQ.
Noll was addressing the Investment Company Institute’s 2011 ICI Equity Markets Conference here Tuesday.
That is not to say that the speed of trading has not become exponentially fast, Noll said.
“I think of it in terms of Gamma, or the rate of change, rather than volatility,” said Noll, who attributed it to the “24-hour news cycle and super-fast trading systems that permit markets to instantaneously react to politics, even though politics itself is slow-moving.”
Gregg Berman, senior adviser to the direction of the Securities and Exchange Commission’s Division of Trading and Markets, largely agreed with Noll. While it would appear that volatility has spiked in recent years, the little amount of academic research on the subject does not bear this out, Berman said.
“While there have been periods of extraordinary movement in the markets over the past three to five years, these are brief waves,” Berman said.
As to high-frequency trading, the SEC does not have the resources to do a detailed study on its effects, but existing studies “show it actually decreases volatility on a millisecond level,” Berman said.
Currently, the focus at the SEC is maintaining an orderly market structure through the circuit breakers and limit up/limit down restrictions, Berman added.
“Sometimes you have to stop trading because the trading mechanism is broken,” Berman said. “I don’t know how to dampen volatility other than through a robust market structure and keeping the market orderly. Let the market determine the fair price.”
However, Harold Bradley, chief investment officer for the $1.7 billion Kauffman Foundation, vehemently disagreed with these assessments.
“We are now trading volatility, and we think it is undermining price discovery. The whole market is trading like it is the same thing,” Bradley said. “On Oct. 4, the iShares Russell 2000 ETF (IWM) rallied 700 basis points in 20 minutes. I have never seen anything like it in my 30 years in the business.
“There is a high-frequency sub-class of electronic trading in front of institutional orders, taking advantage of the buy side because of too much transparency,” Bradley continued. “We also think exchange-traded funds are negatively impacting price discovery of small company stocks.”
