February 23, 2023
By Peter Bower
Individual stock volatility, at times, seems off the charts. Ten- to twenty-percent moves can happen in response to news, expectations, or earnings at alarming frequency. For longer term investors, this is unnerving. The causes are many, but clearly indicate that the trading structure for individual stocks has changed.
Stock trading used to have market makers that often took the other side of trades – no longer. More individuals also owned specific stocks offering a diverse universe of traders. Selling pressure could more easily be offset by buyers. Now, many investors are using baskets of stocks in the form of mutual and exchange traded funds. Therefore, they are one layer removed, and do not respond to these moves.
As a result, high frequency trading algorithms can dominate the trading on any one stock issue. These tend to key on the same factors resulting in exaggerated price moves. Not until extreme price changes occur do other professionals or algorithms step in to take advantage of the opportunity.
The Bull and his partners do not like this environment of extreme volatility either but try to take advantage of such moves rather than be discouraged by them. The Bull has warned that this type of environment was likely. The way to handle it is to stay steady, my friends. Time tends to smooth out these radical short-term price moves.
The Lonely Bull
