The natural evolution of the ever expanding volume of electronic algorithmic trading and present economic conditions has helped to create an extraordinarily volatile daily price action in stock indexes. The art of designing trading programs which will provide consistent returns in deep markets has been the goal of program designers from both big and small operations. Skinny markets have always attracted strategies to search and capture improperly priced instruments, stocks or indexes. These 'parasitic' programs last until the proper bids and offers relative to surrounding instruments take hold. The other downside of skinny markets many times is that they often times are used as legs of protection spreads which become problematic when market conditions change rapidly, (LTCM and Subprime).
So trading well in deep markets has allowed the proliferation of volume programs pushing bids and offers about and making entities such as CME Group extremely profitable. But it is harder to trade well with size when prices moves a bit faster. The adaptability of a particular program's decision logic is tested in markets of unique volatility as we are now experiencing. Across equity indexes, financial instruments, and now many commodity market electronic trading platforms, tremendous movement is revealing both opportunity and risk for trading programs.
The speed of price also decreases the duration of down-trends and up-trends. Events unfold and are adjusted to rapidly in the transparency of price action and ultimately cut the time adjustment. The bears looking for to a sustained downturn given current stock action may find two possibilities; (1) a large break will rapidly unfold forming a bottom quickly or, (2) the break is about over.
The given is that most banks and underwriters have failed to understand, evaluate, or audit risk well. Successful trading programs lead in analyzing risk quickly and efficiently. Electronic markets react to those processes and are better off for it.
