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Infrastructure Amidst Market Volatility – Part 1: A Strange and Uneasy Time

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It’s certainly a strange and uneasy time. Not only did COVID-19 force countries into lockdown, but also the combination of poor planning, uncertainly, economic shuttering, and trillions of U.S. dollars in global stimulus has markets roiling. Just in the United States, the intraday Cboe Volatility Index (VIX) — a leading indicator of market volatility – has peaked at almost record highs (85.4). This surpassed the peak level of 80.74 in the global financial crisis of November 2008. We’ve seen waves of buying and selling as peak share volumes on US equities exchanges hit 19.4 billion shares, which is only comparable to the height of the 2008 global financial crisis. However, if you look at the value of U.S. equities traded, it far eclipsed that of the financial crisis, as almost $1 trillion in value turned over — a staggering 89.6% increase over the highest value traded during the height of the global financial crisis (see Exhibits 1 and 2).

Although market volume was record breaking, the industry generally managed these volumes without falling over. One or two brokers were initially crippled by the volumes, but all of the exchanges and industry infrastructure managed this volume in hand. These firms certainly deserve our respect, given that in March 2020, average trading volumes were 126% higher than the previous March.

Most brokers and asset managers didn’t collapse, but a substantial increase in volatility and volume should have them rethinking their infrastructure capabilities. This is especially true now: they need more automation and are facing more complexity to analyze markets, develop pricing strategies, and manage risk. As algorithms become more complex, trading models need to analyze more data in different ways and from different sources. If not managed appropriately, this will cause anything built on a rocky foundation to be as stable as the Leaning Tower of Pisa, especially if volumes and volatility remain elevated.

Join me soon for part two, “A New Foundation,” where we will discuss the way forward for technology in capital markets: how can they thrive in this new paradigm?