The stock market today fell more than 50 points in the first 10 minutes of trading, with the Dow dipping below 15,000.
June has been a volatile month for U.S. equities with the Dow experiencing 15 triple-digit moves out of 18 sessions.
As we start the final trading day of the month, which is also the last of the second quarter, expect heavy volume and wild swings.
As Business Insider pointed out yesterday, in the last five seconds of the trading day at the end of the month, or quarter, traders brace for what can best be described as intensely insane trading.
The following chart, with blue diamonds representing the end of the month and red ones representing the end of a quarter, shows the dramatic increase in E-mini trades (S&P futures contracts) that transpire at the close of trading at the end of the month, or quarter, compared to E-mini trades at the close of a regular trading session.
Source: Business Insider, Nanex.
This pattern is due to high frequency trading - the use of sophisticated technological tools and computer algorithms that allow for the rapid trading of securities.
The race into HFT began in 2007. By 2010, it accounted for more than 60% of all U.S. equity volume.
From 2008 to 2011, some two-thirds of all U.S. stock trades were executed by high frequency firms. Today it's roughly half.
The reason HFT trading as dipped some is that traders are making less money per trade. Average profits have dropped from about a tenth of a penny per share to a twentieth of a penny.
But trading firms believe there is plenty to be made in the milliseconds edge they get from HFT, and they've been steadily ramping up efforts to trade even faster.
End of the Quarter Window Dressing
In addition to a serious increase in trading at the end of a quarter, there's another factor at play.
In an effort to spruce up the appearance of portfolios and fund performances before presenting them to clients and shareholders, mutual fund and portfolio managers frequently sell stocks with large losses and buy high flying stock at the end of quarter.
Known as window dressing, it is responsible for some hefty end-of-month volume. This quarter, there is some gussying up in order.
Investors were stoked by stocks' robust Q1 showings. Standard & Poor's 500 companies reported a record quarterly profit of $26.71 a share in Q1, up 5.2%. Leading the way were healthy earnings and growth from telecom and consumer discretionary companies.
But projections for the final results from Q2 aren't nearly as bullish. And last quarter's leaders are among this quarter's laggards.
To date, 110 companies have provided guidance on how well the second quarter is going compared to expectations. The numbers are less than encouraging, according to S&P Capital IQ.
Of the 110 companies giving guidance, 79 have been negative and 18 positive. That 4:1 ratio of negative to positive is well above the 2:1 average.
Also, analysts have been increasingly trimming estimates, so it's not clear how the quarter will turn out.
What is clear is that investors can expect more market volatility in the stock market today and the coming weeks.
The good news - we know the best ways to play volatility. Our trading expert Shah Gilani outlined these moves in his recent analysis, How to Play the New Normal: Spiking Volatility.
Stock Market Has No Legs: Moody's Sees Loss of Momentum
- USA Today:
Ask Matt: Can companies keep big profits coming?
- Bloomberg News:
How the Robots Lost: High Frequency Trading's Rise and Fall
- Business Insider:
Chart: The Pure Insanity That Is The Last 5 Seconds Of Trading At The End Of The Month