Explaining the Late-Day Market Trading Surges (and Declines)

Posted by: Lauren Young on October 28, 2008

I was at an ETF media event hosted by NASDAQ OMX Global Financial Products and the Journal of Indexes today. One topic of discussion was the recent bout of late-day stock market volatility.

Today is a perfect example. When the panel met with the media around lunchtime, the DJIA was up some 300 points. In the last hour of the trading session, the market surged significantly to close up 889 points.

Why is this happening?

Even the featured panelists at the media event, who are among the brightest in the investment business, are uncertain. “Talk to 10 people, and you’ll get 10 different answers,” says indexing guru Gus Sauter of Vanguard Group. “Maybe 11,” chimed in Lee Kranefuss, global chief executive officer of iShares, Barclays Global Investors.

One theory for the late-day swings is that mutual funds and hedge funds are selling (or, like today, buying) stocks later in the trading session to cover expected redemptions, or inflows. Another theory is that active managers and hedge funds are meeting margin calls. Maybe it is a result of program trading.

I’m surprised no one has a concrete answer. What is your take on the late-day swings? Why is this happening now? Will it ever end, or is this part of the “new normal”?

Reader Comments

Calvin Parson

October 28, 2008 10:22 PM

"The Buffett Theory" at work; market fear at extreme levels, buy the value companies hitting their 52 week lows. Mutual Funds are rebalancing their portfolios and 'value' investors are accumulating. Money is flowing into the market. Shorts are running for cover.

The election just a week away, sparks excitement of the inevitable infusion of increased goverment spending.

In the rhythmic melody of SADE.."Hang on to your longs"...because "Tennesse Tuxedo will not fail"(American greed).

david

October 29, 2008 2:41 PM

day traders, the volume of whose trading I believe is larger than many have allowed for, are cashing or covering their bets as late a possible in the day. I expect that many 20 and 30 somethings at large wall street firms as stealing company time near closing when they expect it will be least noticed to use company equipment and information to trade for themselves

Steve

October 29, 2008 2:45 PM

LOL - will the housing market ever stop going up? What about the price of oil? No wait, I mean tech stocks...

Of course it's going to end. Nothing lasts forever.

Personally, I wonder if the Working Group on Financial Markets has anything to do with it.

Ray Lopez

October 29, 2008 2:48 PM

Has it occurred to anybody that now that the Fed has an interest in banks, via equity injections, that the Plunge Protection Team can legally intervene in the stock market? Before it was legally harder to do so, from what I've read.

Chadwik

October 29, 2008 2:49 PM

I do know that this happened quite a bit back before the Indexes started falling last October. No one had a good answer then either. Kind of interesting that it occured in October whether the DOW was up or down. I have herd that it may have to do with mutual funds (fiscal) year end activities.

walt

October 29, 2008 2:55 PM

headge funds playing the pump and dump game. There was no logical reason for such a rally, considering the grim economic times we are entering - and everybody knows it.

Chris

October 29, 2008 2:57 PM

It is a combination of many factors including the ones listed in the article - but all due to a highly interconnected, global investment community that allows everyone to react in real-time.

As confidence is restored over the next year the volatility will decline.

Joe

October 29, 2008 2:59 PM

The headline of this entry is misleading. What was explained?

Michael Siculiano

October 29, 2008 3:05 PM

Is it a phenomena whereby you think extremely short term as far as profit or loss is concerned? Today X is up 25 cents- I'll buy X amount of X shares. At 3:30 PM I have to make a determination on which way the market is going to go. If I see activity toward the down side I sell, taking the small profit or buy more if I feel an up trend at close.Enough of this mentality as mentioned above can create a cascade of buying or selling. Kind of simplistic, but then who really has the answer?

J. Wansiewicz

October 29, 2008 3:06 PM

Who's kidding who? The ten brightest minds cannot see that the huge volumes and the late day trading, including trading "on the curve" smells like the influence of a typical commodity maerket trader's attempt to influence direction and trend. With the wild swings and unrealistic limits on trading; this volume reminds me of a commodity market gone wild based on little else but the needs of those executing the trades.

k. Dehais

October 29, 2008 3:19 PM

As an individual investor, I am buying and selling mutual funds a lot these days, as are many to restructure their portfolios. They are priced at the close of the market based on the aggregate closing prices of their respective components. I would never put in an order in the middle of the day not knowing where things will end up given the swings we are seeing. I know what I want to do, but wait to put in orders until the end of the day to make sure the market is going in the direction I want it to, so as not to get whipsawed. If it's going my way, I jump in near the close, as probably do a lot of others, amplifying late day trends.

Gary

October 29, 2008 3:54 PM

It's the electronic trading. 30 years ago you had to have a broker, call him on the phone, and he had to physically take your trade slip to the exchange floor. It wasn't cheap, either. Now all you have to do is click a mouse and you can sell a thousand shares in less than a second. That costs 7 dollars. You have a whole bunch of people investing that know absolutely nothing about the stock market.

O

October 29, 2008 4:38 PM

@Joe - agree completely. No explanation here. And today yet another rollercoaster - up 300, down 350, all in one hour.

Steve

October 29, 2008 5:18 PM

Deceptive. Nothing new or fresh. Should be titled: "No One Can Seem to Explain Late-Day Surges" Lazy sensationalist writing... Author paid by the page hit or ad click? Surely no journalism going on here.

John

October 29, 2008 8:31 PM

Come on folks - this is naked short selling by players who can handle multi-million $$ trades. Hit the market with massive selling during the last minutes of the market day for maximum negative psychological impact, shake up the nervous types who can't go to sleep until they put in a order to sell at market at the open, maybe throw in a little extra selling pressure at the open and then start buying back for your short sale profits. Your buying pressure will be moderated by the selling of the ones that you've put the fear into. If some other big players come in to bottom feed, you may have to accelerate your buying to cover your shorts...no problem it sets the stage for your next late day selling foray. Volatile bear markets like this are purrrfect fot the short sellers. Note: This fantastic opportunity will likely end with the new administration (either one) getting back to the old rules, so do it to it while you can.

Preston

October 29, 2008 11:32 PM

It could also have to do with some of the major players trying to manipulate market sentiment. In these markets, I feel it would be rather easy for a large hedge fund to come in and decide to create a mini panic. Since everyone's expecting huge price swings, all you have to do is start it, and everyone will follow. Must be a day trader's delight.

Lawrence Carrel

October 30, 2008 4:50 PM

K. Dehais is very close. Lauren, as I mentioned at the Journal of Indexes event, during the crash of 2000 the market experience extremely volatile swings similar to what is going on now. At the time I did some analysis and wrote a story for another publication in which I concluded the culprits were the index funds. http://www.smartmoney.com/investing/stocks/a-smartmoneycom-special-report-the-markets-afternoon-storms-7650/

While active mutual funds don't need to put new money to use immediately, index funds need to be fully invested every day. And since they will be sold at the closing price of the day, they submit market on close orders for all the new cash inflows they received that day. And index funds make up a lot of the market. ETFs which are also index funds add to this. Market makers seeing the orders front run these orders by buying up shares to sell to the funds. Then day traders and the rest tag along to capture the momentum. While there may be more players in the market today, I haven't seen a viable explanation to disprove my evidence linking late moves to index funds.
Check out my blog at www.etfsforthelongrun.com

Rocky

October 30, 2008 4:53 PM

I suspect that these wild swings are driving up transactions costs for the funds who have to do these last hour trades to balance their cash (in or out). It certainly makes it harder for mutual funds and hedge funds to beat the market averages in these volatile times. Add in fund management fees and the average fund investor can get hurt pretty badly, even worse in a hedge fund, where leverage magnifies the volatility.

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November 3, 2008 2:59 AM

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S. Cangemi

November 19, 2008 11:31 AM

It's obvious the speculators that have been flushed out of the Oil market with lots of cash have turned to the crippled stock market to create havoc. Greed reigns supreme. The lean get flushed out of thier expensive stocks for pennies on the dollar.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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