Volatility Trading Is a Problem
It increases risk, harms the real economy and distorts the financial system.
Proceed with caution.
Photographer: Daniel Acker/Bloomberg
Like postmodern literature that eschews conventional plot, narrative, and characters, financial markets have become increasingly abstract and remote. Volatility trading offers a good example of why this is so dangerous.
In February, Goldman Sachs Group Inc. reportedly made $200 million in profit on a single day from volatility trading. Anticipating increases, Goldman purchased volatility then sold it profitably to investors needing to cover short positions when the Cboe Volatility Index surged by more than 100 percent and the S&P 500 Index fell by about 4 percent. Those earnings, which were matched by losses elsewhere in the market, were large when one considers that profit at the bank’s entire trading desk exceeded $100 million on only four days in the previous year.