The Hindu Business Line : Beware the volatility

The recovery in equity values on Tuesday after the massive Monday fall only underscores the inherent volatility in the stock market. The recovery, such as it was, is still largely confined to the pivotal stocks but the rest of the market continues to be sluggish. The prices are still ruling at a much higher multiple of their historical earnings than has traditionally been regarded as reasonable. But that apart, the structure of the market has undergone a change as to make volatility its essential ingredient.

Investment profits are no longer being made from spotting that least fancied but under-valued stock ahead of everyone else and then waiting for the rest of the market to catch up. That might perhaps have been true in an era when dissemination of price sensitive information was either slow or inadequate. Technology has clearly altered the rules of the stock market game. The automated process of matching the best buying-selling quote, and the diffusion of equity trade, away from the stock exchange floor to any place from where a computer can stay connected with a trading terminal of a stock broker, have rendered fundamentals of valuation somewhat irrelevant. More important, they have enabled the multitude of investors to seek profits in every inflexion point in the price curve of a stock. From there to guessing how every other investor similarly placed would behave is but a short step. In other words, the situation is tailor-made for every scrap of information to be vested with some significance in causing that tiny inflexion in the price curve and some times even in diametrically opposite directions. Thus, the Monday fall was attributed, among other things, to the decline in the Asian stock market. Yet the continuing decline in those markets on Tuesday did not prevent pivotal stocks in India from recovering some of the lost ground. Similarly, commodities internationally are supposed to be on a long 25-30 year bullish phase. Yet that recognition somehow eluded the market players on Monday.

Institutional investors that need to sell their schemes to retail investors on a daily basis are adding to the short-term volatility, as they too are engaged in the same game of second guessing intra-day price movements. Interestingly, the technology which made retail investors throng the market in their thousands, is also enabling institutional investors mimic their retail clients in trading behaviour. The average ticket size for a transaction is still only a modest 150 shares. The saving grace is that despite all the market volatility, settlement systems have functioned smoothly suggesting that the regulatory oversight mechanism is ship-shape.

More Stories on : Editorial | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Beware the volatility

Telecom: A revolution in progress

Of farmer suicides and wheat situation

Blood-curdling

Reservation conflagration

Education reform, a better bet than quotas

Is some more test of metal due?

Leveraging the human capital

Youth power

Equity market