Crazy Market Swings - Inside the New Normal

Up and down, down and up.

Since this summer, the stock market has been a whirlwind of volatile swings. One day it's up 200 points and the next day it drops 250. Good news from investment banks and earnings from large corporations send stocks higher and the next day's headlines of unrest in the Middle East and logjams in the US Congress and the European Union sends stocks down again.

And sometimes the drops and surges happen for no apparent reason.

This is the new normal, says Boryana Racheva-Iotova, president of FinAlaytica, the risk management solution provider in an interview with Advanced Trading.

"The last six months have been extremely volatile in the markets in general and around the globe but most of the last three years the markets have been volatile compared to what we've been used to," she says.

So far, the markets are switching from one extreme to another, she adds. "It's much more volatile at a faster rate in a shorter period than we are used to."

In a blog post over at Seeking Alpha, the volatility has been hard to ignore:

Technically, we're up in 2011. The Dow started out at 11,691 and, as of November 7, was up over 12,050. But that's still significantly below the year's overall high of 12,807, which it hit on May 2.

FinAnalytica CEO David Merrill told Advanced Trading that hedge funds must shore up their risk systems to get a handle on the new market behaviors.

"You need systems that are more sophisticated about things that are happening and about to happen. The simpler models don't work," he says.

When asked what has a bigger role in the volatility - the news in Europe or the faster electronic markets - Merrill says it's the bad headlines.

"It's really a continuum of the issues (in Europe and Washington DC) and not electronic trading. The issues that are happening on a daily and weekly basis are driving the swings. For the last four months they have been essentially unending and it's not really the fact that the markets are faster or more electronic," he says. "It does factor in but it's not the initial cause."

Does this meant that if the pols get their act together that the wave of wild volatility might level off? Merrill isn't so sure.

It's a bit like that game Whack-a-Mole, he says. "Right now, the politicians potentially could be stronger and do a better job but there are a lot of issues. And as we see, when one issue is addressed people move onto the next one. We should expect that this instance of heightened volatility will be pretty persistent," he says.

So, is this the new normal in your opinion?

Yes, says, Racheva-Iotova. "I think this is the new normal."

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio