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.