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Stock market volatility has been trending higher throughout 2024, underlining the importance of capitalizing on new opportunities for broker-dealers.
The beginning of September saw the Vix index, the US market’s volatility gauge, grow to 56.97% in comparison to the beginning of the year, with more uncertainty to come.
Many institutional traders have been placed on alert off the back of wild market swings caused by a major US rate cut from the Federal Reserve, leading to plenty of speculation over whether the United States economy is destined for a boom period or a recession in the near future.
The Vix has had an eventful year off the back of severe periods of uncertainty, with Middle East tensions causing the index to rally before the Wall Street downturn in early August saw a 65% single-day increase, representing the index’s largest spike in six years.
With a close-run US presidential election looming, the Fed’s ongoing tussle with inflation continuing to cause market uncertainty, and international conflicts remaining far from reaching a resolution, broker-dealers are having to come to terms with high volatility impacting markets for longer.
Although this presents a challenge for institutions, it can also offer some opportunities for optimizing trading strategies to achieve greater profitability.
As markets continue to show widespread volatility, adopting a low-latency strategy that spans multiple global servers could help more broker-dealers overcome the uncertainty of 2024 markets and achieve some impressive results from rapid price movements.
Opportunities Within Volatility
August 2024 has served as a timely reminder of the opportunities and challenges posed by increased market volatility over financial markets.
While the month allowed equity hedge funds to push their year-to-date gains into double-digit territory, managed futures struggled for their fourth month in a row. Tech-heavy hedge funds also experienced losses in the immediate aftermath of Wall Street’s downturn at the beginning of the month.
These varied fortunes are prompting more institutions to reassess their strategies in 2024. Although significant market movements are essential to make money in financial movements, high volatility invariably leads to higher risk.
When the Vix index trends higher, broker-dealers have a significant opportunity to leverage higher profit, but can also lose hefty capital in a short period of time if funds are poorly managed.
During Wall Street’s most volatile days between August 1 and August 5, 2024, losses from global macro quantitative funds and tech-focused hedge funds ranged between 1.5% and 3.5%.
These negative movements saw UBS Hedge Fund Solutions portfolio managers quickly revert from riskier positions, with other hedge funds opting for similar risk-averse strategies.
With risks still threatening to increase volatility throughout Wall Street and across global markets, it’s essential for broker-dealers to keep up with the changing financial landscape and the price movements of equities at a time when major changes can occur owing to a number of different catalysts.
It’s with this in mind that utilizing emerging technologies for improved market monitoring and rapid access to equities could become a major advantage for broker-dealers seeking to capitalize on the fleeting opportunities that high volatility can uncover for institutional investors.
Embracing the AI Revolution
Artificial intelligence is already in the process of changing Wall Street forever, and its integration into low-latency trading and the selection of varied trading servers is beginning to reap rewards for resourceful institutions.
Thanks to AI algorithms that are capable of analyzing vast structured and unstructured datasets in real time, like payment processing, it’s possible for institutions to identify emerging patterns and make automated split-second decisions in executing trades.
In low-latency environments using distributed servers, broker-dealers can enhance their trading strategies to gain a competitive advantage over other institutions.
While machine learning (ML), a subset of AI, can execute trades based on historical data, generative platforms are capable of analyzing live satellite data regarding crop performance or parking lot capacities to gain a more holistic view of global market performance even before official figures are released.
With the August Wall Street crash stemming from concerns over the United States jobs market, ML algorithms can use more social media and sentiment-baed analysis to gain an advanced understanding of employment trends to help institutions brace for the release of unforeseen statistics.
Leveraging Frictionless Market Access
To capitalize on the opportunities provided by market volatility, around-the-clock market access has become essential for broker-dealers.
Much like the usage of virtual private servers (VPS) in the forex landscape, gaining frictionless access to global markets empowers more institutions to leverage 24/7 trading uptime as well as fully flexible and scalable solutions to drive comprehensive market coverage.
In order to compete, adopting prime solutions for brokers that focus on Tier 1 market access through relationships with globally renowned investment banks is a great avenue for broker-dealers seeking to make more proactive movies when navigating wider market uncertainty.
Always-On Risk Management
Crucially, artificial intelligence offers institutions perpetual risk analysis even in high-speed trading scenarios. This makes the technology an essential tool for broker-dealers, particularly in the wake of emerging events that can have a level of market impact that’s challenging to monitor.
With trading opportunities passing by in a matter of seconds, AI can identify opportunities and act on them based on a series of pre-programmed rules by institutions, or by alerting traders by communicating the prospective trade and level of risk attached.
Preparing for Volatility
Periods of high volatility will invariably produce winners and losers among broker-dealers, and institutions with the resources to adopt more responsive solutions will always have the best chance of using market uncertainty to their advantage.
With frictionless access to global servers and low-latency trading, it’s possible to utilize AI and ML in a way that can leverage a higher volume of profitable trades in a more sustainable manner.
The events of August have illustrated the fragility of Wall Street in the face of volatility, and only the institutions equipped to navigate the uncertainty will be capable of profiting from it.
