Markets at Risk Bob Schwartz Zicklin School of Business Baruch College, CUNY WFE Workshop on Market Structure & Statistic...
Volatility and Risk <ul><li>Central importance in Finance </li></ul><ul><li>Risk has a well defined meaning </li></ul><ul>...
Uncertainty <ul><li>We do not know the probability distribution </li></ul><ul><li>We might not even know all of the outcom...
A Little Red or Black Animal That Can Crawl Around and Annoy Us <ul><li>Individually so dumb, collectively very smart </li...
Security Traders Individually very smart, collectively so dumb
Why So Dumb? <ul><li>There is a great deal about volatility that we do not understand </li></ul><ul><li>There is quite a b...
High Intra-day Volatility <ul><li>Really high volatility has been with us for over a year </li></ul><ul><li>I do not mean...
INTRA-DAY VOLATILITY NYSE The First 1/2 Hour
INTRADAY VOLATILITY NASDAQ The First 1/2 Hour
INTRADAY VOLATILITY LONDON STOCK EXCHANGE The First 1/2 Hour
INTRADAY VOLATILITY EURONEXT PARIS The First 1/2 Hour
INTRADAY VOLATILITY DEUTSCHE BÖRSE The First 1/2 Hour
My Current Nasdaq Study <ul><li>52 large cap Nasdaq firms </li></ul><ul><li>Time period: Feb 04 and Feb 05 </li></ul><ul><...
Nasdaq Volatility Differences Between Feb 2004 and Feb 2005 One-minute Volatility w 60 bps Feb 2004 (Pre-Calls) 60 bps ...
Nasdaq Volatility Differences Between Feb 2004 And Feb 2005 10-Second Volatility 40 bps Feb 2004 (Pre-Calls) 5 Min Aft...
What Explains Accentuated Vol? <ul><li>Reason One: Price discovery </li></ul><ul><li>Reason Two: Liquidity creation does...
Reason One: Price Discovery <ul><li>A difficult process </li></ul><ul><li>Especially complex when some investors are infl...
Reason Two: Liquidity Creation <ul><li>Markets are generally two-sided under a spectrum of conditions </li></ul><ul><li>B...
What To Do About It? 1. Market Structure <ul><li>Transparency vs. opacity </li></ul><ul><li>Consolidation vs. fragmentati...
Corporate Stabilization Programs <ul><li>A corporation can set up a STABILIZATION FUND </li></ul><ul><li>Doing so is VOL...
<ul><li>We have been hit by tidal waves of volatility </li></ul><ul><li>Regulation is indeed needed </li></ul><ul><li>But ...
The financial turbulence of 2008 has given us all a great deal to think about! Thank You!
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Price Improvement

Published on: Mar 4, 2016
Published in: Business      Economy & Finance      
Source: www.slideshare.net


Transcripts - Price Improvement

  • 1. Markets at Risk Bob Schwartz Zicklin School of Business Baruch College, CUNY WFE Workshop on Market Structure & Statistics Paris, December 1-2
  • 2. Volatility and Risk <ul><li>Central importance in Finance </li></ul><ul><li>Risk has a well defined meaning </li></ul><ul><li>Risk is not the only contributor to volatility </li></ul>
  • 3. Uncertainty <ul><li>We do not know the probability distribution </li></ul><ul><li>We might not even know all of the outcomes </li></ul><ul><li>Uncertainty is a major contributor to volatility </li></ul><ul><li>We have not paid sufficient attention to uncertainty as a cause of volatility </li></ul>
  • 4. A Little Red or Black Animal That Can Crawl Around and Annoy Us <ul><li>Individually so dumb, collectively very smart </li></ul>An Ant
  • 5. Security Traders Individually very smart, collectively so dumb
  • 6. Why So Dumb? <ul><li>There is a great deal about volatility that we do not understand </li></ul><ul><li>There is quite a bit that we think we understand but don’t! </li></ul>That’s dangerous!
  • 7. High Intra-day Volatility <ul><li>Really high volatility has been with us for over a year </li></ul><ul><li>I do not mean long-run vol (weeks, months, or years) but… </li></ul><ul><li>Intra-day vol! </li></ul><ul><li>Price changes of 1%, 2% or more are common </li></ul><ul><li>A 1% daily price change  250% annual change! </li></ul><ul><li>What does intra-day volatility look like? </li></ul>
  • 8. INTRA-DAY VOLATILITY NYSE The First 1/2 Hour
  • 9. INTRADAY VOLATILITY NASDAQ The First 1/2 Hour
  • 10. INTRADAY VOLATILITY LONDON STOCK EXCHANGE The First 1/2 Hour
  • 11. INTRADAY VOLATILITY EURONEXT PARIS The First 1/2 Hour
  • 12. INTRADAY VOLATILITY DEUTSCHE BÖRSE The First 1/2 Hour
  • 13. My Current Nasdaq Study <ul><li>52 large cap Nasdaq firms </li></ul><ul><li>Time period: Feb 04 and Feb 05 </li></ul><ul><li>We examined per day: </li></ul><ul><ul><li>390 1-minute intervals (9:30-16:00) </li></ul></ul><ul><ul><li>30 10-second opening intervals (9:30-9:35) </li></ul></ul><ul><ul><li>30 10-second closing intervals (15:55-16:00) </li></ul></ul><ul><li>Volatility measured by high-low range for the interval </li></ul>“ The Quality of Price formation at Market Openings & Closings: Evidence from the Nasdaq Stock Market” Michael Pagano, Lin Peng, and Robert Schwartz
  • 14. Nasdaq Volatility Differences Between Feb 2004 and Feb 2005 One-minute Volatility w 60 bps Feb 2004 (Pre-Calls) 60 bps Feb 2005 (Post-Calls)
  • 15. Nasdaq Volatility Differences Between Feb 2004 And Feb 2005 10-Second Volatility 40 bps Feb 2004 (Pre-Calls) 5 Min After Opening 5 Min Before Close 40 bps Feb 2005 (Post-Calls) 5 Min After Opening 5 Min Before Close
  • 16. What Explains Accentuated Vol? <ul><li>Reason One: Price discovery </li></ul><ul><li>Reason Two: Liquidity creation doesn’t just happen </li></ul><ul><li>Volatility in opening minutes: Price discovery </li></ul><ul><li>Volatility in closing minutes : End of day effects </li></ul><ul><li>Volatility at any time of the day : One-sided markets </li></ul>
  • 17. Reason One: Price Discovery <ul><li>A difficult process </li></ul><ul><li>Especially complex when some investors are influenced by what they see other investors doing… </li></ul><ul><li>That is when we get information cascades </li></ul>
  • 18. Reason Two: Liquidity Creation <ul><li>Markets are generally two-sided under a spectrum of conditions </li></ul><ul><li>But sometimes they are one-sided…. </li></ul><ul><li>Liquidity dries up on one side of the market and volatility spikes… </li></ul><ul><li>Information cascades… </li></ul><ul><li>And, when prices head south, who wants to catch the falling knife? </li></ul>
  • 19. What To Do About It? 1. Market Structure <ul><li>Transparency vs. opacity </li></ul><ul><li>Consolidation vs. fragmentation </li></ul><ul><li>Temporal consolidation and call auctions </li></ul><ul><li>Circuit breakers and volatility interruptions </li></ul><ul><li>Stabilization programs </li></ul>
  • 20. Corporate Stabilization Programs <ul><li>A corporation can set up a STABILIZATION FUND </li></ul><ul><li>Doing so is VOLUNTARY </li></ul><ul><li>The fund is RUN BY A FIDUCIARY </li></ul><ul><li>Shares and capital are put into the fund </li></ul><ul><li>Shares are purchased in a falling market but… </li></ul><ul><li>Shares are also sold in a rising market </li></ul><ul><li>All orders are entered at pre-announced price points in pre-announced sizes according to an algo formula that is common knowledge </li></ul><ul><li>Orders are executed in call auction trading only </li></ul><ul><li>I proposed this in Fall 1988. I still believe in it. </li></ul>
  • 21. <ul><li>We have been hit by tidal waves of volatility </li></ul><ul><li>Regulation is indeed needed </li></ul><ul><li>But it must be appropriate </li></ul><ul><li>Will it be? </li></ul><ul><li>One thing is for sure… </li></ul>What To Do About It? 2. Regulatory Structure
  • 22. The financial turbulence of 2008 has given us all a great deal to think about! Thank You!

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