Quants Warn Trading Costs May Rise on Reopening Volatility
Quants Warn Trading Costs May Rise on Reopening Volatility
(Bloomberg) -- Quantitative investors and strategists say a reopening in economies across the globe could trigger renewed volatility in financial markets, increasing trading costs and weighing on portfolio returns.
Anchorage, Alaska-based McKinley Capital Management is worried that a fresh bout of turbulence may emerge during the summer as economies reopen and companies resume issuing guidance. Bid-ask spreads could widen as a result.
“Volatility is just hiding for a little bit,” said Robert Gillam, chief executive officer at McKinley Capital, in an interview. “As the opening of the world economy comes back online, there will be fits and starts.”
Bid-ask spreads and intraday swings rose worldwide as markets tumbled in March, raising market impact on transactions by as much as three to four times the usual cost on some indexes, according to McKinley’s analysis.
Investors will gain increased clarity from companies as they resume guidance about the effects of the lockdowns on their businesses, alongside their prospects as the global economy restarts. The combined effect will likely create some extra volatility during the summer as markets digest the information. For now, “we’ve got a bit of a window to make some trades,” Gillam said.
While things have calmed down, those swings could return. Because economic fundamentals other than monetary policy are so hard to predict right now, volatility is the main driver for investor decision-making right now, said Olivier d’Assier, head of applied research for Asia-Pacific at Qontigo. Investors will “head for the sidelines” if volatility rises again, he said.
Brokers said markets are going back to normal only by some measures.
While trading volumes are similar to the levels prevailing in January before the market turmoil, volatility during the week ending May 15 was still about 56% higher, and bid-offer spreads were 42% wider on MSCI Inc.’s all-country index, said Patrick Mohr, head of execution consulting and index research at Instinet Pacific Services, a unit of Nomura Holdings Inc.
“We may have normalized as far as we’re going to get in terms of volatility,” he said. “Expecting to go back to January levels doesn’t make sense to me given the economic upheaval we’ve observed.”
Higher volatility could be a feature of markets for the long-term, according to the brokerage Liquidnet Holdings Inc., meaning traders and investors will likely need to continue their vigilance on not only the swings themselves but the associated costs of navigating that trading environment.
“There’s every possibility that as companies digest their own performance through the coming reporting season that volatility may remain quite high for years to come, as it did during the global financial crisis and after,” said Tristan Baldwin, head of equities for Asia Pacific at Liquidnet.
©2020 Bloomberg L.P.