WSJ: Why Are Markets So Volatile? It's Not Just The Coronavirus

Published March, 2020

By Gunjan Banerji

The market is dominated by computer-driven investors that rely on signals such as volatility and momentum

Traders like Michael Pomada help explain why the stock market is going through its most turbulent period in recent memory.

Mr. Pomada was in good spirits as he drove his convertible to his office in Los Angeles’s Century City complex before sunrise on March 9. Investment funds managed by his $4.5 billion firm, Crabel Capital Management, were up about 5% for the year. He wasn’t especially concerned about financial markets or the economy, even though oil prices were tumbling that morning.

Yet, all day, Crabel sold stock futures and other investments, contributing to a 2,014-point, or 7.8%, drop in the Dow Jones Industrial Average.

Two days later, the blue-chip index fell into a bear market-—as Mr. Pomada’s firm continued selling—bringing an abrupt halt to an 11-year bull run that began in the throes of the financial crisis.

Like a growing number of investors today, Crabel relies on preset algorithms to make computerized trades. They are dictated by a series of inputs. And one of the most important of these inputs is the market’s own volatility.

As a result, when things get wild, the computers at Crabel and other firms start selling—helping make it wilder still.

“We need to cut position size when market volatility pops,” even if the positions seem like winners over the long term, said Mr. Pomada, Crabel’s chief executive. “It can feel awkward, but we know we’re doing the right thing from a risk perspective.”

The stock market has been plunging as investors struggle to judge the impact of the coronavirus, a price war in oil and their impact on the global economy. Monday’s fall of nearly 3,000 points in the Dow Jones Industrial Average, or more than 12%, marked the second-worst day in its 124-year history. But those reasons don’t fully explain the remarkable volatility.

Since the mid-February market peak, the Dow Industrials have closed more than 1,000 points lower on six trading days and rebounded at least 1,000 points four times. Adding to those moves, and potentially hastening them, are technical factors that have little to do with how investors feel about the outlook for companies, earnings and the economy.

In a dramatic shift since the financial crisis, the market today is dominated by computer-driven investors whose machines react to a series of technical and other factors, as well as by more-traditional investors who rely on reams of fast-flowing data. On many days, forces such as the market’s volatility and momentum, derivatives activity and the market’s liquidity—how easy or difficult it is to get in and out of trades—can help drive trading.

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